Author Topic: S&P Inflation Adjusted - outlook not so good for early retirement?  (Read 1814 times)

cko

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S&P Inflation Adjusted - outlook not so good for early retirement?
« on: September 03, 2014, 10:18:16 AM »
It is commonly accepted that in the long term, stocks have offered a 10%+ annual return.

Even inflation-adjusted, it looks like from 1950 to 2009, stocks have average a 7% return, assuming dividends are poured back into the portfolio:

http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm

This is very good.

However, in that very article, it concludes:

"As can be seen, the stock market was very profitable, in real terms, in the 1950 to 1965 and 1983 to 2000 periods. On the other hand, it didn't perform well from 1965 to 1983, and neither it did for the last decade. Still, during these periods, it partially worked as a shelter from inflation."

So you can see that there are 15-20 year periods of amazing growth, where investors made a killing, and 15-20 years where they were getting killed.

If you happen to be in that 15-20 years of prosperity, you're doing very very well. If not, you're doing very badly. Look at the chart from 1965 to 1983, and from 2000 onward.

The problem with all this is that we don't choose which time period we start investing. If I graduated college at age 22 and aimed to retire at age 32, and this time period was in the 2000s onward, following the passive index-investing advice would not have yielded me great results. I may be doing okay at age 52, but my aim is to retire at 32. At 32, if my inflation-adjusted return is -3.4%, I'm not ready to retire. I have to keep working.

Mr. Money Mustache's main source of passive income is from his rental properties, and he and his wife do a lot of little projects here and there. They also have the skills to get above-average paying jobs if necessary. Long story short, they have a lot of safety nets.

TLDR
The good news: from 1950-2009, a period of 60 years, the market returned 7% over inflation.

The bad news: if a person aims for 10-year retirement, they better hope they aren't unlucky enough to be investing in one of those 15-20 year recessions, or they better have some other sort of income that can let them wait out the recession periods, because the last thing you want to do is start selling your holdings to pay for living expenses when the market is stagnant (or worse).

Of course, Mustachianism isn't just about 10-year retirements - it's about being able to do the things you love (and maybe those things put money in your pocket) and learning to be content with very little. But this is just food for thought.


skyrefuge

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Re: S&P Inflation Adjusted - outlook not so good for early retirement?
« Reply #1 on: September 03, 2014, 11:53:17 AM »
The bad news: if a person aims for 10-year retirement, they better hope they aren't unlucky enough to be investing in one of those 15-20 year recessions, or they better have some other sort of income that can let them wait out the recession periods, because the last thing you want to do is start selling your holdings to pay for living expenses when the market is stagnant (or worse).

You seem to be mixing up the accumulation and withdrawal portions of a person's lifetime. I can draw nearly the opposite conclusion that you do from the same data. Having the stock market be "low" (and stay low) during your working decade is the opposite of "unlucky", it's a dream! It should be everyone's goal to "buy low" after all.

The key insight is to understand that your investment period is not merely your 10-year working career. It's your entire lifetime. In the ideal scenario, the market stays constant or even declines throughout your working career, and then goes skyrocketing back upwards when you retire. In fact, that's basically what's happened for your hypothetical 22-year-old who worked from 2000 through 2009. With the benefit of hindsight, we now know that he probably would have been ok to retire even if his expenses in his first year were greater than 4% of his stash. The returns since then have "made up for" the poor performance in the 10-year prior period.

And then the converse is the 22-year-old who started working in 1990. He would have actually been the "unlucky" one, despite the tremendous gains in the market during his 10 year career. Retiring at the end of 1999 at a 4% withdrawal rate would have become much less fun in the ensuing years.

But despite the totally different scenarios, if both 22-year-olds had invested the same amount of money per month over their 10 years, their retirement success might actually look pretty similar. Mr. 1990, with the help of the bubbling market, might have built his stash so large that he was only withdrawing 2.5% in his first year of retirement, while Mr. 2000, enduring 2 crashes, might have needed to withdraw 6% in that first year. But after 5-10 years in retirement, they both might converge around the safe 4% rate.

Essentially this shows that a 10 or 15 year period is still too small of a window to look at to see "average" market performance. But if you zoom out to 40-year-chunks, investment success starts to look a lot less dependent on your start time. Turns out this is illustrated beautifully in the new IndexView. Set the drop-down to Real S&P (with Dividends), click the "to" to change it to "for years", set the years to 40, and then slowly move the 40-year window throughout the available history. No matter what point you look it, it almost always shows the same basic shape of an exponential curve: a long slow rise on the left ending in giant cliffs on the right.
« Last Edit: September 03, 2014, 11:55:17 AM by skyrefuge »