A difficulty in assessing asset managers is figuring out how much of their track record of success can be attributed to luck versus skill. An investment professional can have a world-class strategy, but run into a market environment that is out of their favor. The inverse is also true where stars align and faults in a particular investment style are masked by favorable market conditions.
Lots of bad golfers have hit holes-in-one.
Planning for retirement is not immune to this luck/skill dilemma, and sometimes people run into a spell of bad luck when the time comes to stop working. Which, if you're invested in the stock market, how bad of luck can it be?
To help answer that question from a historical perspective, we created American's Unluckiest Retiree, which is someone who built up a $1 million portfolio by investing solely in the S&P 500 (using State Street's SPDR® S&P 500® ETF as a proxy, ticker "SPY") and decided to retire on January 1, 2000. For additional fun, let's assume they were a Y2K doomer and went all in on the stock market thinking the world was going to end anyways - why not be aggressive?
The reason this retirement date is "unlucky" is because after being blessed with five consecutive years of returns north of 20% from 1995 to 1999 (they would have had to only start with $287k in that first year to hit $1 million by the end of the millennium)...
... this newly minted millionaire retiree suffers three consecutive years of pain (-9.73% in 2000, -11.75% in 2001 and -21.59% in 2002):
Ouch. Bad luck for sure, and worse given that now you have to live off of that diminished portfolio.
But is all bad that begins bad? Let's find out.
Assume this retiree subscribes to the 4% withdrawal rule, pulling $40k out on January 1, 2000 and adjusting that number up by 2% per year to account for inflation. Let's further assume they pull this adjusted amount out every year on the first day of the year.
$40,800 in 2001.
$41,600 in 2002.
$47,200 in 2009, when the S&P 500 had fallen over 36% the year prior and had yet to reach the bottom.
You may be asking: did they even have $47,200 to take out in 2009? If so, when did they actually run out of funds? The next year? 2020? 2022?
The answer? They still haven't:
From 2000 through 2025, this "unlucky" retiree was able to pull $1.3 million in total withdrawals from their portfolio and still have over half a million dollars invested.
26 years. The bursting of the tech bubble. 9/11. The Great Financial Crisis. A global pandemic.
But distributing more money than they started with, and still some left over.
The lessons here are immense:
Sequence of returns risk matters a lot when decumulating your assets - starting off with 3 straight negative years is rare and painful when pulling money from equities, though as this experiment shows it doesn't have to be a death sentence.
Growth is crucial to generate long-term, inflation-adjusted income - compound returns are real and powerful.
Having multiple, diversified sources of return can mitigate the risk of running out of money in retirement. For example, if this retiree had other sources of income for 2000 and delayed that first $40k withdrawal by just one year, to date they would have pulled out just $60k less ($1.24M vs $1.3M) but would have $393k more still invested ($903k vs $510k)!
On a spreadsheet, this investor has technically achieved a goal of inflation-adjusted retirement income without running out of money, over a time period you could argue qualifies as a nearly full retirement lifespan (they would be 91 today if they retired at age 65). But investors are not spreadsheets, they're human beings that experienced a lot of turmoil along the way. Nevertheless, even in unlucky times fortune can favor the bold.
Brent Coggins
Chief Investment Officer, Triad Wealth Partners
This is a simplified, hypothetical scenario used to stress test a "worst-case" sequence-of-returns period and is not a suggestion that an all-equity allocation is appropriate for any particular investor.
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