Retirement Income Portfolio Survival
As financial professionals, we believe understanding the dynamics of retirement income portfolio risk can be crucial to investment success. The survivability of five hypothetical retirement portfolios over the 20-year period ended December 31st, 2018 shown in the accompanying table is not intended as investment advice but is intended to help clients better understand retirement portfolio risk and conquer perhaps the worst of all financial fears: running out of money in retirement. The data is based on a continuing professional education session by Professor Dr. Craig Israelsen, an independent economist whose research we license.
The results of the five portfolio risk levels illustrated a range from very conservative to aggressive. All five portfolios assume a retiree withdrew 5% of the portfolio value annually, and annually increased withdrawals by 3% to keep up with inflation. Pick whichever starting balance — $250,000, $500,000 or $1 million — best applies to your situation.
What stands out is that the most diversified of the five portfolios outperformed considerably — broad diversification worked! That diversification worked may come as no great surprise; conventional wisdom and academic research hold that diversifying is wise. Remarkably, diversification worked even though this was a 20-year period of low returns on stocks.
Stocks, a riskier investment in a retirement portfolio, showed an internal rate of return over the 20 years of just 2.69% — only six-tenths of 1% better than the least risky of the five portfolios, the one 100% invested in short-term Treasury Bills.
Why did stocks perform so poorly? The 20-year period started in 1999, at the peak of the dot-com bubble. The Standard Poor's 500 index did not recover until 2006, and then it dropped again in the bear market of 2008. A retiree picked a terrible 20 years to be an aggressive investor 100% invested in stocks.
Over the much longer 49-year period, stocks did outperform cash by a huge amount and they also outperformed a diversified portfolio.
The point is that even in this terrible period for stocks, the growth engine of a retirement portfolio, a broadly diversified portfolio outperformed. The next 20 years are likely to be as unpredictable as the last 20 years, but this illustrates how broad diversification helped a retirement portfolio survive through a period in which stocks performed unexpectedly poorly.
These are the indexes that represent the ETFs used in the Passive 7Twelve® Portfolio.
- A Prudent Perspective On Recent Volatility
- A Tale Of Two Economies
- Amid Worries, New Equity Risk Premium Data Explained
- GDP Rose More Than Expected; Stocks Top Record Again
- Slower Growth Confirmed By June Leading Economic Indicators
- Stocks Closed At A Record High; Should You Worry?
- Amid Record Stock Prices, Fed Policy Is A Risk
- Uncle Sam Delivers A Strong Economy
- A Dramatic Pause, As Expansion Breaks Longevity Record
- The Explosion In Real Retail Sales You Never Hear About
- Amid Signs Of Weakness, Fed Reverses Course; Stocks Rally
- Three Stories Affecting Your Wealth This Week
- Buried In The Fed's Financial Stability Report, A Potential Risk To Investors
- Forget Everything You Know About Inflation
- China Trade War Sparks Fear But Not Stock Losses
- Surprisingly Good Productivity, Jobs, Inflation And Trade News
- Stocks Break Record High On Economic Surprises
- U.S. Leading Indicators, Retail Sales, And Atlanta Fed Forecast Signal Strength
- S&P 500 Closes Near Record High Amid Growing Ebullience
- An Early Indication The Economy Is Stronger Than Expected
- A Spectacular Quarter For U.S. Stocks Just Ended
- Real Economy Strengthens, Yield Curve Inverts And Mueller Report Drops
- Despite Crises, Economic Fundamentals Are Strong
- How Misperceptions Spread And Cause Confusion On Money Matters