Could 2022 be worse than 2001?

November 2, 2022

In my post three weeks ago, I happily declared that the 4% Rule works again, thanks to the much more attractive equity and bond valuations. It’s always fun to deliver pleasant news. But keep in mind, everyone, that this refers to today’s retirees with their slightly depleted portfolios. But how about the folks who were unlucky enough to retire earlier this year in January 2022, when equities were at their all-time high? That cohort is off to a bad start, to put it mildly. Of course, it’s too early to tell what should have been the appropriate safe withdrawal rate for that cohort. We’re only less than a year into a multi-decade retirement. My recommendation back then would have been that due to the wildly expensive equity valuations and low bond yields one should have treaded a bit more cautiously. Maybe do 3.50-3.75% for a 30-year traditional retirement and 3.25% for a 50 or 60-year early retirement. And maybe raise that a little bit again depending on your personal circumstances, especially if you expect large supplemental cash flows from pensions and Social Security later in retirement, see my Google Simulation sheet (Part 28 of my SWR Series). Also notice also that with my estimates, I’m a bit more aggressive than the widely-cited Morningstar study recommending a 3.3% safe withdrawal rate for a 30-year retirement.

But recently, I’ve come across some rumblings that put into question all this cautious retirement planning. The reasoning goes as follows: First, the year 2000 retirement cohort actually did reasonably well with the 4% Rule. Second, the Shiller CAPE at the peak of the Dot-Com bubble was higher than in 2022. Bingo! The 4% Rule should do really well and even better for the 2022 cohort, right? I’m not so sure. That line of reasoning is flawed, for (at least) two reasons: First, the pre-Dot-Com-Crash retirement cohort experience wasn’t as pleasant as some people want to make it now. And second, I actually believe that the fundamentals in late 2021 and early 2022 were not very attractive at all. In fact, in some crucial dimensions, they were significantly worse than at the height of the Dot-Com bubble. Hence today’s post with the slightly scary and ominous title. Two days late for Halloween, I know.

Let’s take a look…

The year-2000 retirement cohort recap

A persistent myth circulates in the personal finance and retirement planning community, namely that the cohort that retired in the year 2000 at the peak of the Dot-Com bubble actually did really well since then. Some people even claim that the 2000 retirement cohort’s portfolio recovered back to its initial portfolio value. And that’s net of withdrawals! First, let’s put that to the test. Let’s examine the worst-case cohort at the Dot-Com peak:

  • Initial portfolio $1,000,000, 60% S&P 500, 40% 10y benchmark bonds.
  • Start withdrawing $3333.33 monthly, starting on August 31, 2000.
  • Withdrawals and portfolio values are CPI-adjusted.
  • I run the simulations up to October 31, 2022.

Let’s see how the portfolio value has evolved over time:

August 2000 retirement cohort portfolio balances. 60% stocks, 40% 10y Treasury benchmark bond. $3,333.33 monthly withdrawals at the beginning of each month.

Indeed, the portfolio held up reasonably well. As of October 31, 2022, 22 years into retirement, you still have about 50% of the initial inflation-adjusted value. If you had retired back then with a 30-year horizon you would now look really solid. It’s highly unlikely that you will run out of money with only 8 years left.

But notice a few caveats:

First, at no time during this cohort’s retirement would you have even come close to recovering your initial portfolio value. This myth circulates on the web because people are ignoring inflation (again). Yes, the nominal portfolio value would have temporarily come back to above $1,000,000 in 2020, only to drop again in the most recent bear market. But you can’t have your cake and eat it too; either we keep the $40,000 in (real) withdrawals constant in which case the portfolio never recovered. Or the nominal portfolio recovered to $1,000,000 but the withdrawals were much higher than $40,000.

Even worse, at the bottom of the 2009 bear market, you would have depleted the portfolio down to about $467k. Most retirees would have likely been too scared to keep withdrawing $40,000 p.a. at that point. Not knowing how well and how swiftly the market would recover between 2009 and 2021, most retirees would have likely reduced their withdrawals at that time. And even worse, if they had thrown in the towel and gotten out of stocks at or near the bottom of the bear market in 2009, they would have never recovered. So, I always mark the 2000 cohort as one of those Trinity Study successes that were really a failure in disguise. I like to use the analogy of “Trinity Airlines” where your plane landed safely at its destination, but along the way, the engines were on fire and the pilot was screaming “we’re all going to die!”, see item #5 in Part 26 of the SWR Series). Not really a success!

And also keep in mind that the 60/40 portfolio allocation was the best possible case. If you indeed had lacked the foresight to put your money into that exact allocation, your August 2000 retirement could have been worse. For example, if you think back to the height of the Dot-Com bubble when everyone was drunk with confidence that the stock market will grow at double-digit rates forever you might have felt pretty stupid with 40% bonds in the portfolio. You might have raised your equity share, maybe to 75% or even 100%. Hey, what can possibly go wrong with pets.com and WebVan, right? Well, with the 75/25 portfolio you’d be down to $400k by now. With a 100% equity portfolio – favored by many FIRE bloggers, by the way – you’d be down to less than $160k. That portfolio with a current 25% withdrawal rate ($40k annually out of a $159,839 portfolio) will likely not survive for another 8 years.

August 2000 retirement cohort portfolio balances: Different asset allocations would have performed much worse!

Almost equally scary, even with a 60% equity portfolio but using a short-term fixed-income instrument (e.g., 3-months T-bills, money market, etc.) for the remaining 40%, you would have depleted the portfolio down to below $200k. That one’s also doomed even for a 30-year horizon. What would have been the rationale for the short-term fixed-income allocation? That was the allocation that worked really well in the 1970s when longer-duration bonds got hammered. So, in August 2000, to have a successful 30-year retirement, you had to ignore what worked best in the 60s, 70s and early 80s and instead foresee the long walk down in Treasury yields.

And needless to say, even with that perfect 60% stocks and 40% intermediate bond allocation, if you had retired in 2000 with a 50 or even 60-year horizon, then the 4% rule doesn’t look so hot for you today, and much less in 2009! In 2022, you’d have only $506k left, which implies that you now run an effective withdrawal rate of 40/506=7.9% with 28 to 38 years left, respectively. Time to cut your withdrawals significantly, probably down to 4.5% of today’s portfolio, which would translate into about $22,800. A 43% pay cut. Better hope that Social Security will make up the difference!

Why 2022 fundamentals look worse than 2000/2001

Another flaw is the idea that 2022 looks much more benign than the Dot-Com bubble peak. Let’s take a look at some of the financial and economic fundamentals at the two (month-end) market peaks: August 2000 vs. December 2021, see the table below.

Comparison: 8/2000 vs. 12/2021. Source: Robert Shiller, Federal Reserve (Table H.15), BLS, ERN’s calculations.

It’s certainly true that stocks were more severely overvalued back in 2000. The Shiller CAPE stood at almost 43 compared to about 38 at the most recent peak. If you invert the CAPE ratios into an earnings yield (CAEY = Cyclically-Adjusted Earnings Yield = 1/CAPE), though, that’s not a meaningful difference. Today’s earnings yield of 2.61% is only 28bps higher than the 2.33% at the peak of the Dot-Com bubble. Of course, if we use the improved ERN-adjusted CAPE ratio, we notice a slightly larger gap of 0.83 percentage points, but that’s still not a significant enough difference to pop the champagne corks in early 2022, especially considering all the other factors that look a lot worse in 2022, such as:

  • Rates: The 2022 interest rate picture, in contrast, is atrocious compared to 2000. The 60/40 portfolio post-2000 benefitted from the amazing diversification benefit of your bond portfolio. You started at almost 6% yields for the 10-year and then cashed in on the duration effect during the three recessions and bear markets in 2001, 2007/8, and even in 2020. In contrast, 2022 started with a 10-year yield of 1.52%. Not much room to walk that down, so even ex-ante this wasn’t a pretty picture. And ex-post, we know what happened: interest rates rose during 2022 and bonds didn’t offer any diversification benefit. In fact, year-to-date up to October 31, 2022, the S&P 500 and the 10-year Treasury bond index are both down by roughly 18% before inflation and 23% in real terms. And the 60/40 portfolio as well.
  • Inflation: It’s not that inflation was particularly low in 2000. In fact, headline CPI and PCE were still a bit elevated. But core inflation was right where we want it: 2.48% for the CPI and even a little below 2% for the Core-PCE, which is the Federal Reserve’s preferred inflation measure. Compare that to 2021/2022. We faced not only high but accelerating inflation in early 2022. That’s bad for bonds, bad for stocks (at least in the short- to medium-term) and it erodes the (real) portfolio value in addition to the already poor nominal returns.

This combined rate+inflation picture meant that monetary policy is a great threat today, while in 2000 it was “Alan Greenspan to the rescue.” I remember the 2000 situation well because I started my job at the Federal Reserve Bank of Atlanta in September 2000. The Fed had just finished its rate hike cycle and declared victory over inflation. The central bank now had room to ease monetary policy and assist the economy during the slowdown. The opposite is going on right now. The Fed sat on its hands for too long, and instead of nipping inflation in the bud in the Spring of 2021, people pontificated about transitory inflation. Until inflation became pretty clearly self-fulfilling and much more permanent by early 2022.

So, if the 2000 market peak is not really the best comparison subject, is there a more comparable historical cohort? You bet, which brings me to the next point…

Let’s not forget: 2022 Looks much worse than the mid-1960s!

Another fly in the ointment of the 2022 cohort betting on things working out as “well” as in 2000: We have had certifiable failures of the 4% Rule in the mid-to-late-1960s when the Shiller CAPE was only in the low-to-mid-20s. For example, the CAPE was 24.04 in October 1965 and 22.78 in November 1968 and the 30-year safe withdrawal rate of a 60/40 portfolio dipped to 3.81% and 3.85% respectively. You don’t want to feel too safe when the CAPE is 30+. It took much less than that in the 1960s for the 4% Rule to fail! Today, with the Fed raising rates while the economy is on the ropes, looks so much more like the 70s than the late 1990s and the 2000 market peak.

But there’s some good news, too!

Before I send everyone on their way all sad and depressed, there are also a few positive signs. First, a bear market may not be as harmful to savers because the flipside of Sequence Risk is Dollar-Cost Averaging (DCA). Depending on how far you are from retirement and to what degree and how quickly equity valuations mean-revert, you may even benefit from a bear market by picking up stocks at a steep discount, right before another rally takes off. See my old post from 2019 “How can a drop in the stock market possibly be good for investors?“. So, for everyone not even retired yet – and that’s probably more than 50% of the FIRE community – just sit back and relax.

Second, as I wrote in my post earlier this year about retiring in a high-inflation environment, the level of inflation is less important than the direction. In other words, declining inflation rates, if they indeed come to pass over the next year or so, could be mostly positive for both the stock and bond market. Of course, some naysayers will object that inflation is stubbornly high and we’ll have to go through a Paul Volcker 2.0 experience. But being the eternal optimist, I cross my fingers that the Fed – while admittedly a bit late to the party – is certainly more responsive now than in the 1970s. If today’s Federal Reserve doesn’t drag out the inflation problem for a decade as in the Burns/Miller era (strictly speaking even starting under Martin), we should muddle through much faster and with much less pain and damage than back then.

Conclusions

Well, so much for today. After delivering mostly good news in the two October blog posts, i.e., today’s CAPE is not as astronomically high if we make the appropriate adjustments (10/5/2022) and with the more attractive valuations today’s retirees can also raise their withdrawal rates (10/12/2022), I just wanted to make sure I don’t sound too upbeat. I must defend my reputation as the retirement grinch.

Thanks for stopping by! Please share your thoughts and comments below!

Title Picture: The Scream by Edvard Munch

79 thoughts on “Could 2022 be worse than 2001?

  1. Great post! Just curious if you considered the reverse glide path method for the 2000 cohort? I thought that analysis was interesting but I don’t remember seeing much follow-up to it. Thanks!

    1. A GP would have helped if you stretched it out long enough to cover both 2001 and 2008.
      Again: bonds did a phenomenal job during that decade: a high average return and a negative correlation with stocks.

  2. I loved the Portfolio Balances: Real Vs. Nominal graph as it provides a great illustration. A person retiring at 50 years old in August 2000 with 100% equities is now 72, is down to $160K balance, and is now covered by Medicare and was able to wait until age 70 to maximize their Social Security benefits. Obviously, this is not a great outcome but also might not be dire. What if this same person is in great health at age 72, had some years with less than the 4% withdraw and skipped some inflation adjustments. There is still plenty of upside potential even with this negative scenario. Thanks a ton for the article.

  3. Good article. You know what Nixon said, I’d rather have inflation than unemployment! Which is higher, political risk or monetary policy risk?

    1. You’ve reclaimed your retirement grinch status successfully!

      History can certainly tell us some valuable pieces of information. I think the trap many fall into is thinking history is deterministic, and the result is they over engineer the solution to the outcome they want. There is just too much that can occur over 30+ years. Better I think to do risk assessment and then apply an allocation to it, an allocation that includes more than just stocks and bonds. This is what I’ve learned over the past year.

      I wish it was as simple as just setting some allocation of stocks and bonds and everyone keeps winning. While it isn’t time to get in the bunker, it is time I think to broaden our investment acumen if we want to avoid the scary ride aboard Trinity Airlines.

        1. I think the main difference (apart from the worse bond valuations that you describe) is that theory and practice of monetary policy has significantly improved since then.

          Or maybe that’s just what economists want us to think! We’ll see.

          1. Until recetnly I had my doubts. I had concerns that Fed policy might go through cycles of competent-incompetent-competent-incompetent. But maybe I was wrong. Looks like the Fed might be able to thread the needle this time.

    2. Haha, thanks for the reminder! Unfortunately, Nixon’s idea that there’s a tradeoff between the two (Phillips Curve, NAIRU) has been solidly debunked. In the 1970s you ended up with both.
      Also: as people might find out on November 8, inflation is a political risk as well. We shall see.

      1. Ha, it’s been said that the only thing we learned from history is that we learned nothing. That’s how we got here…

  4. Not sure what the takeaway should be? If I was happy with 4% after the last post, am I unhappy now? 😂

    1. I am equally confused. What is the practical takeaway for a 2022 retiree between these recent articles? Can you please elaborate on some scenarios of what would put the 2022 cohort in line for a more successful retirement if this article is implying we’re doomed?

      1. See my post above. Meant to post here.

        IMO it’s time to think beyond the simple set and forget allocation and be more active.

          1. take a look at the work Todd@Financial Mentor is doing. The approach is risk management, the tools are inexpensive, and while there is a time investment needed to figure out in what manner one implements the solution, the solution itself is easy to manage via low or no cost trading.

                1. Trend following (aka TAA) has long made more sense to me than buy-and-hold, though the behavioral risks are significant. For starters, the start date sensitivity, as Tyler at Portfolio Charts has done great work with, has just been too high for total market indices; it’s either feast or famine, and the latter can have decades-long effects on investors, especially retirees. Diversification across return drivers (aka factor investing) makes a lot more sense to me, but trend following has historically helped to ‘smooth out’ returns even better.

                2. As I mentioned in the other reply: Trend following is not the same as TAA. Trend-following can be a signal in TAA, but normally TAA includes a lot more than just momentum. When I was at BNY Mellon, we ran TAA strategies without any momentum signals.
                  In a nutshell, momentum is really the poor-man’s TAA for retail investors, because momentum is the easiest to understand, calculate, maintain, and implement.
                  But you’re completely correct: it has its problems. For example behavioral issues.

  5. First of all these are excellent blog posts, highly appreciated! I especially enjoyed the posts on leverage and the box spread trades. I would guess that the example of the 2000 cohorts might be a good case study for the use of more (international) diversification away from only US market-cap equities?

    1. Good point. International diversification would have worked beautifully during the 2003-2007 recovery. But international stocks went through nasty bear markets as well in 2001 and 2007-9. And non-US stocks also underperformed after the financial crisis. So, a 30% US stocks, 30% non-US and 40% bond portfolio would have underperformed the plain 60/40 portfolio since 2000.

  6. Love your blog!

    Small typo: “That portfolio with a current 25% withdrawal rate ($40k annually out of a $159,839 portfolio)..” You probably mean 2.5%, but your end conclusion holds up either way.

      1. Of course! Maintaining $40k would leave you with a huge 25% withdrawal rate. This is what I get for commenting before the sun’s up.

        Thanks for setting me straight.

  7. Ern,
    Excellent post an usual. The 2nd graph with different asset allocations looks to be real returns. The chart title “Portfolio Balances: Real vs Nominal” is confusing. Most likely due to a copy of the previous chart title. Suggest changing to “Real Portfolio Balances for Different Asset Allocations”.

  8. I read this as “no one has the perfect plan” When flying on “Trinity Airlines” be prepared to make small changes along the way? Best course of action is to cut spending when encountering turbulence! Small changes can increase distance but nobody has a guaranteed arrive on time ticket?
    Best calculator I have seen is one that calculates chances of death along with guesses about value of portfolio. Pretty humbling to see reaching 90 years old with most of a million or more left is 19% but death wins 81% of the time!!! Guess you cannot take it with you???

    1. I like that one too. I think a lot of the FIRE community thinks they will be healthy and vibrant at 100 years old. Great optimism but not statistically likely!

        1. Yep, for male-female couples it’s more complicated…the latter should live longer.

          But for a single male, best to retire by age 55 if he wants a 30 year retirement.

          Because a male waiting until 65 to retire has a statistical remaining life expectancy of less than 20 years.

          1. Disagree. I would not recommend using the life expectancy. It means that there’s a significant probability of going >LE. Not exactly 50% because of the difference between median and mean but it’s close. I’d target the 90% point of the age distribution. That can very easily extend into the 90s for a healthy single male at age 65.

  9. Another consideration for the 2000 vs 2022 cohorts is housing appreciation. In practical terms it has provided a nice cushion for 2000 retirees (option to downsize or even exit). My understanding is that the past 20 years have been the best returns in real estate EVER. I wouldn’t count on the next 20!

  10. Another great post. It would be interesting to see the path (or at least the current balances) for the various portfolios using a 3% and a 3.5% withdrawal rate?

    1. Good question. Here are the final values for 3,3.5,4% and 60/40,75/25,100/0

      Allocation/WR 3.0% 3.5% 4.0%
      60/40 $874,428 $690,197 $505,967
      75/25 $840,677 $629,771 $418,866
      100/0 $678,131 $418,985 $159,839

      1. Thanks for running the numbers! It’s amazing how much of a difference it can make going from a 4% to 3% withdrawal rate, in particular on the 100/0 asset allocation. I think it highlights the importance of not being too aggressive with either your asset allocation or your withdrawal rate, although obviously the caveat is that it will take you longer to build up your assets. Interestingly though when I ran the numbers based on Australian equity returns, after having enough to retire based on a 4% withdrawal rate over half the time it only took another year or two to having enough to be able to retire with a 3% withdrawal rate, due to the lumpy nature of stock market returns (up big or down big). I would imagine that this is fairly similar for the US as well.

  11. Yeah 2000 looks scary. Do you think it will cause the 4% rule to be re-calibrated? Especially since social security etc is not really a part of the study.

    The hardest part of all this is while it is always interesting to say what could have worked in hindsight, how do you survive with a financially stress-free retirement living it forwards =) Trinity airlines indeed.

  12. “I don’t sound too upbeat”…don’t worry Big ERN you’re still the Marc Faber of the FIRE community !

  13. I’ve been enjoying your latest posts examining the 4% rule following your dynamically adjusted CAPE ratio. Also, just read and loved the new post validating the power of the 60/40 as the only really safe allocation for the 2000 retirement cohort. Amazing work as usual! A reminder never to fly Trinity Airlines again, even though it landed on the Hudson and all passengers were saved! Hilarious!

    I was wondering if you had ever examined the historical behaviors or run any simulations with the somewhat new asset class on the block involving managed futures, namely the new darling of the crop called “Manager Directed Portfolios – iM DBi Managed Future Strategy ETF” ticker symbol DBMF. It’s up 32.58% YTD and seems to have glommed on to an interesting little new strategy twist: examining the monthly 13Fs from the top 20 Hedge Funds and creating a passive index style liquid alternative ETF investment vehicle which gives one the benefit of being invested the combined current asset allocations of the top 20 hedge funds, while bypassing the typical 2000 bps of profit that is usually skimmed off for the firms’ profits before clients see any return on their investment. They benchmark against the Société Générale SG CTA Index.

    There is certainly a price to pay with the .95 ER, but I’m curious if holding a small percentage, say 5-15% of the portfolio wouldn’t significantly improve and sustain a long-term retirement horizon portfolio such as yours and others in the FIRE community. Obviously, it’s a bit too early to tell how this fund will eventually pan out, (only in existence since June 2019) but the idea of consolidating 20 of the largest hedgefunds’ research divisions and having those aggregate positions curated and rebalanced monthly and wrapped up into an ETF product seems like an interesting proposition to me. For example, a 60/40, with 60% S&P 500 30% Intermediate-term Treasury Bond Fund and 10% DBMF so far in 2022:

    https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2022&firstMonth=1&endYear=2022&lastMonth=12&calendarAligned=true&includeYTD=true&initialAmount=1000000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&reinvestDividends=true&showYield=true&showFactors=false&factorModel=3&benchmark=VBINX&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VFIAX&allocation1_1=60&symbol2=VFITX&allocation2_1=30&symbol3=DBMF&allocation3_1=10

    I remember you have examined volatility futures and other types of strategies in the past, but do you think there might be a way to gather enough simulation data to look into something like what the DBMF folks are executing here? I think there is a benchmark called the Bloomberg NEIXCTAT Index that also might be a source to consult. In any event, Sharpe is going to improve and standard deviation will be tamed in all of the examples I’ve looked at so far. But I could also imagine chaos, if all 20 hedge funds doubled down on the same asset classes at the wrong time within a narrow timeframe and surprise – a total collapse ensues. But as Markovitz was fond of saying, “Diversification is the only free lunch in investing.” DBMF’s current asset class exposures are:

    US Equities 1%
    Emerging Markets Equities -2%
    International Developed Equities -9.0%
    Commodities -10.6%
    Currencies -57.2%
    Fixed Income -96.4%

    Top 5 holdings are:

    JPY/USD -13.5%
    Eurodollar -23.2%
    2 Yr Treasury -23.3%
    EUR/USD -43.7%
    Gold -11.4%

    I would be curious about your take on this fairly new liquid alternative asset class and whether there could be validity in maintaining a small allocation devoted to this over the long haul.

    Some interesting findings in this study I’m including here below:

    https://thehedgefundjournal.com/trend-following-ctas-vs-alternative-risk-premia/

    All Best!

    David

    1. Thanks for this very thoughtful and detailed comment.
      CTAs (commodity trading advisors) have been around for the longest time. Essentially, they are trend followers and they can go long or short in a large variety of asset classes: equities, bonds, currencies, commodities.
      That has worked out spectacularly well for CTAs recently. It’s also noteworthy that CTAs had a similarly impressive performance during the late 2000s and through the global financial crisis.
      But: They didn’t do well between 2010 and 2021. Which is odd, because equities certainly trended nicely, but markets were also very choppy with shorter downdrafts that caused whipsaw losses in any trend-following strategy. But 2022 so far has been kind to the trend followers.
      I’d certainly endorse putting a small share, maybe up to 5-10% into this diversifying asset. And thanks to innovations in the ETF business we can now get this kind of exposure and don’t have to use opaque and expensive hedge funds.
      I can’t really simulate past returns because this fund only started in 2019 (and CTAs in general go back to maybe the 1990s). But I’ve played around with simple rules combining trend-following in stocks & bonds and the results looked a little bit better than static weights. This is certainly a route where we could improve our SWR analysis!

      1. Many thanks for your reply. The additional asymmetry provided especially for some added protection during severe down years like ’22, when bond correlations were positive with stocks would seem an interesting solution to pursue. Of course, there are all kinds of hidden risks involved: currency risk, interest rate risk, borrowing costs, etc., including counter party risk in the ETF itself, but if managed well, this might be an interesting alternative asset class. Too bad there aren’t sufficient data sets that could be integrated into your tool set. Anyway something to ponder, while flying the friendly skies of ERN Airlines.

        1. The problem with this approach is that you may not catch the turning points very well.
          For example, momentum strategies are probably still long-USD, but we might have seen the end of the USD appreciation and now the EUR might appreciate again considering that the ECB raises rates and the FED likely slows down rate hikes. It might take a while for the momentum signal to catch that and jump on the bandwagon.

    1. I “retired” on the 14th of January 2022., At age 36. I had a great 6 months off, but I’ve gone back to work. I want to be in a retirement cohort that ends up with way too much money.

      1. Right at the end of the post, titled: “What if you retired in January 2000?”

        Excellent comment re the portfolio balances!

        FWIW, I have been tracking my Pot balance, both up to and since I pulled the plug. And whilst you are 100% correct re the portfolio balances – nominals are what you spend in the here and now. So, I personally use a mixed chart that is my accumulation path, revalued to the year I pulled the plug, up to the point I pulled the plug, and nominals thereafter. IMO, as long as you know what you are plotting then everything should be fine, and it is easy enough to convert between nominals and reals. But you must always be aware of simple [but possibly apparently odd] artefacts such as: I have more today than when I pulled the plug (in nominals), may well mean I have less today than when I pulled the plug (in reals). But my balance today is always denominated in nominals, not reals. Horses for course IMO.

        1. Of course, my personal balances are denominated in nominal dollars as well. But for comparing portfolio balances over a long time it’s best-practice to display CPI-adjusted.
          Another option: display the portfolio as a multiple of the withdrawals.

      2. ERN,
        Looking again at JPG’s work – for the 1994 cohorts he plots both nominals and reals in separate graphs at the start. He calls them Portfolio Values & Portfolio Values (constant dollar).
        He also tabulates in the expanded section for each portfolio the w/d rate which [vs 4%] is a good indicator if you are winning (or losing) vs inflation. This is what JPG calls “Percent of assets (2)”

        If I understand them correctly, JPG’s charts use published returns from purchasable funds. Therefore, his results include a whole host of real-world artefacts. Having said that I think platform fees would still be excluded.

        1. Good point.
          In my sheet I use index returns, but you can specify an expense ratio. So, maybe 1994 retuns of stock+bond portfolios are a little too depressed by the much higher expense ratios back then.
          Not sure what “platform fees” would be. But Fidelity doesn’t charge anything in addition to maintain an account.

  14. I “retired” on the 14th of January 2022., At age 36. I had a great 6 months off, but I’ve gone back to work. I want to be in a retirement cohort that ends up with way too much money

  15. Sequence of return risk is directly related to our current situation. The massive Fed and Gov’t. stimulus since at least 2009 has resulted in bubbles in stocks, bonds, and real estate. I don’t think we have ever had bubbles in all three simultaneously.
    When you overpay for assets, your future returns are lousy, that is partly what causes bear markets.
    We have overpaid for all three.
    It gets worse. We are fighting 3 major headwinds: Debt, Demographics, and De-globalization.
    All three are an economic drag on an economy with high interest rates.
    Add to that the Russia/Ukraine war, promising food and energy crises around the world.
    This will not likely be a short or shallow recession. It looks for like 1966 to 1982 where the Dow floated between 1000 and 700 for 16 years. 1000 in 1966 and 700 in 1982. Not the kind of returns that produce a comfortable retirement.

    1. Very good points. These are exactly my concerns as well. I’ve certainly reduced my forecasts for productivity and growth. That will also drag down all asset returns.
      Some optimists will point out that’s some great productivity gains ahead from AI. Not so sure, though.

  16. just some napkin math for an alternate perspective on the 60/40% money market scenario, if someone had pursued a rising equity glidepath then they could’ve spent down the cash for the first 10 years. by around 2010 i suppose the equity part of the portfolio would be preserved sufficiently.

  17. Quick weird question for you. Would you cash out all your 401k to pay for a ransom if that’s your only savings and the person is very important to you?

      1. Nah, it was a real situation. I had to pay ransom to get my kid back. I cashed all my 401k to pay it. Sad sad sad…and no, it’s wasn’t in the US

  18. Lieber Herr ERN,

    vielen Dank für Ihre ausgezeichnete Arbeit. Ihre Beiträge sind schon fast besser als jeder Horror-Film 😉

    Grüße aus Österreich

  19. Great article and data points. I know you can’t possibly back test all portfolio allocations, but if I may be so bold, I believe many have at least a mix of some cash/bonds/stocks. What do you think about how a 20% cash, 20% interm. bond fund and 60% stock fund would have held up?
    Thanks for keeping this site so current and interesting.
    chipperd

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