A well-diversified, passively managed portfolio of low-cost index funds has fared well for retirees over the years despite volatile market conditions. Modest annual withdrawals from conservatively managed portfolios should not have caused retirees any concern about running out of money. For most portfolios used in this analysis, accounts ended with higher values than their starting point in 1999 even with withdrawals and difficult markets.
The fear of going broke during retirement is overblown in America. This negativism is in part instilled by overly negative assumptions about the country’s future as well as media articles using Monte Carlo simulation models that suggest most retirees will face insolvency over the next 50 years.
The estimates that most retirees will be broke in the future may be technically correct given the subjective data used to calculate the results. However, I speculate that if we get to a point where this scenario actually happens, we would be more concerned with finding food and water than the size of our retirement account.
These pseudo-scientific assumptions about going broke in retirement are grossly overstated, in my view. Let’s be realistic. If you’ve been retired in the past several years during one of the most brutal stock markets in history and haven’t gone broke yet, you’re probably not going to.
The past 12 years have delivered some of the most gut-wrenching, volatile financial markets in decades. A severe bear market in equities started in 2000, accentuated by terrorist attacks on 9/11, finally hitting bottom in the fall of 2002. The market recovered by October 2007, only to take another downturn more severe than the first. Stock prices are not still back to their 1999 levels.
Sample Core-4 Portfolio with 60/40 Allocation
Given the reality we just went through, I wanted to see how retirees would have fared if they followed a disciplined, low-cost investment approach. I created seven Core-4 portfolios ranging from 20 percent in equity to 80 percent in equity to illustrate how well a passive investment strategy performed for retirees since 1999.* I assumed retirees withdrew a monthly fixed amount from each portfolio over the entire period and that they rebalanced their accounts regularly to maintain their asset allocation.
The Core-4 equity allocation is composed of 60 percent US equities, 30 percent international equity, and 10 percent in real estate (REITS). The bond portion is 100 percent in the Barclays Aggregate Bond Market index. All of these funds can be purchased for a minuscule expense through the Vanguard Group or a similar index fund provider.
The analysis assumes a retiree has $1,000,000 in retirement savings in 1999, invests in one of the portfolios, and withdraws income ranging from $2,500 monthly ($30,000 annually) to $5,000 monthly ($60,000 annually). Each portfolio was rebalanced regularly.
Open this PDF file to follow along with my analysis. The tables provide data on all withdrawal scenarios for each of the seven Core-4 portfolios. Here are some highlights in the data:
- A moderately-aggressive retiree who maintained a 50 percent stock and 50 percent bond portfolio and took out $3,333 per month ($40,000 annually) over the past 12 years ended with a March 31, 2011 balance of $1,114,947. The monthly low point occurred in February 2009 at $783,174 and the monthly high point occurred on October 31, 2007 at $1,169,803.
- A conservative retiree who maintained a 30 percent stock and 70 percent bond portfolio and took out $4,167 per month ($50,000 annually) over the past 12 years ended with a March 31, 2011 balance of $1,065,642. The monthly low point occurred in February 2009 at $858,603 and the monthly high point occurred on October 31, 2007 at $1,100,782.
- Even the most aggressive retiree with the most aggressive withdrawal amount didn’t run out of money over the period. An 80 percent stock and 20 percent bond portfolio with $5,000 per month withdrawals ($60,000 annually) over the past 12 years ended with a March 31, 2011 balance of $589,369. The monthly low point occurred in February 2009 at $405,408, and the monthly high point occurred on October 31, 2007 with $1,008,979.
I don’t recommend that a retiree have an aggressive portfolio with 80 percent in stocks if this is the only source of retirement income. A more prudent allocation would be 30 to 50 percent in equity. On the other hand, an aggressive allocation may be appropriate if the portfolio is only one component of wealth and a person is trying to build a larger estate to pass on to heirs.
The reason for this analysis is to mitigate fears of going broke in retirement. No passive investor ran out of money during one of the worst bear markets in history, and no prudent and disciplined retiree should fear doing so in the future.
Low-cost passive investing is an ideal strategy for retirees. Fees are extremely low, there’s no speculation involved, and you can ignore the talking heads on television blabbering on relentlessly. With a low-cost, passively managed portfolio, you enjoy retirement without fear. Isn’t that what it’s all about?
*The Core-4 portfolios used in this analysis are based on index returns rather than the actual mutual fund returns that represent the Core 4 funds selected. The actual mutual funds that represent the Core 4 portfolios carry a small expense ratio that will reduce the returns in the analysis slightly, whereas the index returns do not reflect fees. See this link for more information about the Core-4 portfolio created by Rick Ferri of Portfolio Solutions, LLC.
