Will a stock market decline kill my retirement?

Will a stock market decline kill my retirement?

Key Points:

  • Those with a sound plan based on realistic goals and expectations who stay diversified, patient, and disciplined have little reason to worry that the stock market decline seen in 2022, or even declines much worse, will radically derail their retirement.


  • While the exact timing and duration of stock market declines are unpredictable, declines happen with such frequency they should be expected, not feared.


  • The direct effect of stock market declines on one’s income has historically been very weak.


Will a stock market decline kill my retirement? That’s a question on the minds of many these days, especially retirees and those wishing to retire in the not-too-distant future. We thought it might be a good time to take a moment to look at this issue.

You can be forgiven for thinking the answer to that question is “Yes.” Recently, the S&P 500 index was 20% below its prior high, making the decline to start 2022 a “bear market”. The media is full of stories about how such a drop is devastating to anyone retired or wanting to be retired. This happens anytime the market declines substantially, which is to say it happens a lot. That’s the media.

Media influence aside, it is perfectly reasonable to think that since lower asset values aren’t good, declines in values must be problematic. While the exact timing and duration of market declines are unpredictable, declines happen with such frequency they should be expected, not feared. Even if the circumstance around each decline is unique, declines have been a normal part of market behavior. This is why the expectation of periodic stock market declines is built into the retirement models we construct for clients. If your plan assumes markets will not be volatile or that you can reliably predict the variability over time, you have a lousy, even dangerous plan.

If your plan assumes markets will not be volatile or that you can reliably predict the variability over time, you have a lousy, even dangerous plan.

On the other hand, if you have a sound plan built upon reasonable expectations and goals, the answer to the question, “Will a stock market decline kill my retirement?”  is almost certainly “No.”

In 1994, William Bengen had a study published in the Journal of Financial Planning. He created a hypothetical retiree and split the retiree’s portfolio into one half in stocks as represented by the S&P 500 and one half in bonds as represented by 5-year U.S. Treasury notes. The portfolio was rebalanced annually. This study is where the so-called “4% rule” of a sustainable withdrawal rate originated.

Going back to 1926, Bengen determined that every such hypothetical retiree who started spending a bit over 4% of their assets or less in year one of retirement and inflated that amount every year still had money after 30 years.

Put another way, for every million dollars accumulated, every retiree in history could have succeeded if they started their retirement spending about $40,000 per year or less. All of them.

Think about that. The person who retired right before the crash in 1929 and ensuing Great Depression didn’t run out of money. Nor did the person who retired at the start of the 50%+ stock market decline which began in 1973 and the ensuing high inflation years. We’ll discuss how that is possible in a bit.

Subsequent studies showed that diversifying beyond those two asset classes (as we advocate) increased the safe starting withdrawal amount to about $45,000 per year per million dollars of assets. Other studies indicate even higher starting amounts if some assumptions are changed.

Bengen’s study assumed that spending was steadily increased for inflation every year. However, we have observed that retirees only increase their withdrawals every few years and spending naturally tapers off as they age. This is because most retirees are more active and spend more on things such as travel and recreation early in retirement, when younger.

piggy bankIn addition, when stocks decline or things seem tough economically, people naturally tend to be a bit tighter with their expenditures. If a good portion of a retiree’s spending is on discretionary “wants” versus true “needs,” they have an ability to scale back for a bit. Studies show the ability to curtail withdrawals by 10% for one to two years in the event of a major market decline can yield starting spending amounts closer to $60,000 for 30-year periods.

Another assumption in Bengen’s study is a 50/50 allocation between stocks and government bonds. Many retirees have had larger allocations to stocks in their working careers and have the tolerance to maintain more than 50% of their assets in stocks, especially early in their retirement. A somewhat higher allocation to stocks can support a slightly higher withdrawal rate, within limits.

So how is it that neither of Bengen’s retirees ran out of money in 30 years during the two above-mentioned downturns? The two biggest factors were bonds and rebalancing.

Bonds lose value from time to time when interest rates rise but those losses are temporary and are far less severe than the drops in value stocks can exhibit. By holding a diversified array of bonds when stocks drop significantly, the needed withdrawals can be funded by bonds coming due or sold with minimal losses.

Bengen’s study assumed 50% in bonds. If starting at $40,000 per year per million, that’s roughly 12.5 years of withdrawals which can be funded without having to sell stocks when they are down. Stocks have never gone down and stayed down for that long. Even during the 1930’s, stocks rose more than 28% in four of those calendar years (1933, 1935, 1936 and 1938).

This is where the discipline of rebalancing comes in. Rebalancing means buying more stocks when stock prices are down substantially. This buying accelerates the recovery process.

By contrast, after stocks rise, rebalancing allows for the funding of withdrawals by selling a little stock at a profit. Rather than fighting the volatility, rebalancing takes advantage of whatever volatility comes. No market prediction is required.

Rather than fighting the volatility, rebalancing takes advantage of whatever volatility comes. No market prediction is required.

That’s all well and good for retirees but what about younger people? Doesn’t a bear market set them back? Probably not. In fact, bad markets can accelerate the path to funding retirement. Younger people who have a healthy allocation of diversified stock holdings and continue saving for retirement will buy more shares when prices are down – a strategy which will pay off when stocks recover.

stocksThose on the cusp of retiring tend to find dealing with a bear market particularly tricky, which is understandable because it can cause them to second guess their timeline. But the decision to delay retiring is largely a function of spending plans. For instance, if they were planning on withdrawing $40,000 for every million accumulated to spend on largely discretionary “wants,” the declines of 2022 are likely immaterial.

There is no magic to that $40,000 figure. It is simply the amount that has always worked. If one were to spend more in the first year of a thirty-year retirement, financial security is not endangered. The carriage doesn’t instantly become a pumpkin. For a variety of reasons, some of which we already mentioned, starting retirement with a higher spending level can be quite reasonable.

Don’t forget that these figures are all based on 30-year time frames. Thirty years is more than ten years longer than the life expectancy of a healthy 65-year-old. If you are older or otherwise have a shorter timeframe, spending levels can be higher.

All of the above is the backdrop for why we believe that those with a sound plan based on realistic goals and expectations who stay diversified, patient, and disciplined have little reason to worry that the declines seen in 2022, or even declines much worse, will radically derail their retirement.

What is more likely to cause problems is excessive spending or abandoning a sound plan at a bad time. There is good news on this: one’s spending level and the choice to stick to a sound plan are items one can control. Other controllable items are being adequately insured, employing smart tax management techniques, and controlling news intake.

We are already seeing headlines like, “A $5 Trillion ‘Wealth Shock’ Is Cracking Americans’ Nest Eggs.Remember, the financial media is not there to help you make prudent decisions about your money. They exist to sell ads. They know nothing about you, your family, your dreams, your resources, your constraints, your temperament, your tax profile, or your plans.

Focus on what you can control. Ignore the noise. Invest, don’t speculate.


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Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on FacebookLinkedIn, or Twitter.  

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About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.


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