2% return only in 10 years!?

[Jamese20]

hi guys,

i see from recent posts the stock market has only 2% returns over the last decade? isnt this extremely concerning for investors? thats a long time and even though its 0.7% better than you get in savings accounts its still not good for 4% withdrawal is it?

just wanted some more experienced heads on this thought?

i will be honest its the 7% average returns that attracted me to investing because savings accounts are just depressing and i want my money to work harder.

[Travis]

Where are you seeing that? The S&P500 is up 65% since AUG 2006.

[Jamese20]

mmm has it on one of his posts? unless i am drastically misreading it?

[nereo]

yeah, your estimate is way off.

Dividends alone have accounted for ~2% growth/year.

If you looked at the PEAK just before the crash in 07 the share price has gone from about 1580 to 2170 in 9 years.  That's the worst 8-10 period you can pick ending with today.

[nereo]

mmm has it on one of his posts? unless i am drastically misreading it?

link the post.

[Jamese20]

it is the "dude where is my 7% investment"

just realized its not a new post though :) :) :)

even still, isnt this a worry? especially if you want to retire within 10 years assuming 5% investment returns?

[nereo]

it is the "dude where is my 7% investment"

just realized its not a new post though :) :) :)

even still, isnt this a worry? especially if you want to retire within 10 years assuming 5% investment returns?

Not if you understand the 4% "rule" and how markets work.
Briefly, markets go up.  On average, they have gone up roughly 7%/year after subtracting for inflation.
BUt, they also sometimes crash, and you can find the occasional multi-year time period when stocks have gone down.  For example, over all 2 year periods, markets have been negative about 24% of the time.  Over 5 year periods it's 20%, and even over 15 year periods markets have stayed down 5% of the time.

So do this freak me ok and keep me up at night?  No.  Why not?  Because while sometimes go down, and while they can stay down for years (as measured from peak-to-peak), the normal withdraw strategy of taking out only 4% per year accounts for this.  Remember how gains are on average about 7% per year?  well we've had 10 year periods that have averaged over 12%/year.  Those boom cycles help cover the bust cycles.

...that, and we're not mindless drones that can't adapt to new situations.  Worried about your portfolio during a down market?  You can cut expenses or get a part time job until things improve.

[Jamese20]

Thanks for the feedback..

im very new to all this after really deciding to put my good job and hard earned money to work for me instead of blowing every penny..

19% tax free money is going into my pension and 13% is going to be in the stock market in the vangaurd life strategy 100 via an isa - once my debts are paid off it will be increased to 50% at least

i am just trying to get as much knowledge as i can for when serious money is being invested every month

[mathjak107]

real returns since 2000 are less then 2%  a year on average on the s&p 500 with dividends reinvested  . those are inflation adjusted returns . i think they are around 1.88% the last 15 years .

[nereo]

real returns since 2000 are less then 2%  a year on average on the s&p 500 with dividends reinvested  . those are inflation adjusted returns . i think they are around 1.88% the last 15 years .

Um.... not quite:
Since 2000
Total S&P 500 Return (Dividends Reinvested)    40.74%
Annualized S&P 500 Return (Dividends Reinvested)    2.09%
Inflation Adjusted (CPI)?    

Last 15 years (e.g. since July 2001):
Total S&P 500 Return (Dividends Reinvested)    72.03%
Annualized S&P 500 Return (Dividends Reinvested)    3.68%

Both of those include rather large peaks just before crashes (in Sept 2001).  For comparison, has we chosen 2002 as a starting point returns would have been 6.1% or the last 5 years (10.5%)

[The_Dude]

Depends a lot on the dates you use.  Here is a cool calculated to look at real returns adjusted using CPI.

https://dqydj.com/sp-500-return-calculator/

[nereo]

Depends a lot on the dates you use.  Here is a cool calculated to look at real returns adjusted using CPI.

https://dqydj.com/sp-500-return-calculator/

...and from the same website, this one is very useful if you want to know the range (min, maximum & average) of various time periods of investment. 
https://dqydj.com/sp-500-historical-return-calculator/

For example, over 10 year periods the average was 6.77%, maximum 19.96% and minimum -5.93%.  SD was 5.161% (ergo, it's very rare but not unheard of to lose money over a 10 year period).

[MustacheAndaHalf]

Most investors translate their worries about stocks into a mixed stock/bond allocation.  Especially when you retire, and hit a series of stock market drops, you can pay expenses from the bond allocation (and rebalance to buy stocks when they're down).  That's also why in Vanguard's nest egg calculator you'll see slightly better success rates (having money to spend over the entire time frame) with some bonds than with none.

[arebelspy]

Thanks for the feedback..

im very new to all this after really deciding to put my good job and hard earned money to work for me instead of blowing every penny..

19% tax free money is going into my pension and 13% is going to be in the stock market in the vangaurd life strategy 100 via an isa - once my debts are paid off it will be increased to 50% at least

i am just trying to get as much knowledge as i can for when serious money is being invested every month

I'd suggest reading JLCollins' stock series on his blog:
http://www.jlcollinsnh.com/stock-series

Or his book The Simple Path to Wealth.

[mathjak107]

real returns since 2000 are less then 2%  a year on average on the s&p 500 with dividends reinvested  . those are inflation adjusted returns . i think they are around 1.88% the last 15 years .

Um.... not quite:
Since 2000
Total S&P 500 Return (Dividends Reinvested)    40.74%
Annualized S&P 500 Return (Dividends Reinvested)    2.09%
Inflation Adjusted (CPI)?    

Last 15 years (e.g. since July 2001):
Total S&P 500 Return (Dividends Reinvested)    72.03%
Annualized S&P 500 Return (Dividends Reinvested)    3.68%

Both of those include rather large peaks just before crashes (in Sept 2001).  For comparison, has we chosen 2002 as a starting point returns would have been 6.1% or the last 5 years (10.5%)

if you go by completed years jan 2000 to dec31 2015 it was 1.88% .  does 1.88 to 2.09 make a whole lot of difference ?  meh

[Juan Ponce de León]

But who the hell invests only once and then leaves it for 15 years?  This forum is about saving and investing constantly.  The point of regular investing is that even if a 'crash' happens, you'll actually benefit in the long term because you'll then start making your new investments at the new lower prices, when the price recovers you'll have more shares and more capital than if the price stayed flat and the crash never happened.  When the price goes to new highs you will actually have a crapload of money, not the flat return the index has made over that time because you have been buying at every price point along the way, automatically averaging down into every dip, automatically getting more shares per $$ when prices are cheap and buying less shares per $$ when prices are expensive.  You don't even have to think about it.

[Jamese20]

so 15 years at 2%???? wow that is some length of time for poor returns?

i do fail to see how the 4% rule works in this scenario guys?

[Jamese20]

But who the hell invests only once and then leaves it for 15 years?  This forum is about saving and investing constantly.  The point of regular investing is that even if a 'crash' happens, you'll actually benefit in the long term because you'll then start making your new investments at the new lower prices, when the price recovers you'll have more shares and more capital than if the price stayed flat and the crash never happened.  When the price goes to new highs you will actually have a crapload of money, not the flat return the index has made over that time because you have been buying at every price point along the way, automatically averaging down into every dip, automatically getting more shares per $$ when prices are cheap and buying less shares per $$ when prices are expensive.  You don't even have to think about it.

yes good point - i suppose all the examples are based on a lump sum investment... but i wonder what that would be when investing a specific amount per month for 15 years?

[mathjak107]

so 15 years at 2%???? wow that is some length of time for poor returns?

i do fail to see how the 4% rule works in this scenario guys?

for 4% inflation adjusted to hold up  it takes an overall average REAL  return of 2% over the first 15 years of a 30 year time frame . there is no study i saw that quantify's what you need going out longer to have it hold .

that is pretty much what it would take to have the income survive .

you may have little left and be broke at 35 years but that is what it takes .

the y2k retiree 15 years in with a balanced portfolio is in the same shape the 1929 retiree was 15 years in . passing but not by much .

no matter how much things improved after 15 years kitces found it was to little to late .  the big 4  failures the 4% rule is based on 1929, 1937,1965/1966 all happened because real returns broke  1% over the first 15 years .

by the way , all 4 had respectable 30 year average returns , but the first 15 years did them in .

[mathjak107]

But who the hell invests only once and then leaves it for 15 years?  This forum is about saving and investing constantly.  The point of regular investing is that even if a 'crash' happens, you'll actually benefit in the long term because you'll then start making your new investments at the new lower prices, when the price recovers you'll have more shares and more capital than if the price stayed flat and the crash never happened.  When the price goes to new highs you will actually have a crapload of money, not the flat return the index has made over that time because you have been buying at every price point along the way, automatically averaging down into every dip, automatically getting more shares per $$ when prices are cheap and buying less shares per $$ when prices are expensive.  You don't even have to think about it.

why 15 years ?

well suppose you were me and by year 2000 i accumulated a nice healthy balance . so you went to sleep for 15 years and expected to wake up seeing average long term returns compounding on your EXISTING MONEY  .

well you wake up 15 years later and while all the new money you had added on auto pilot while sleeping  has grown nicely , you are like WTF ,  looking at that big pile of existing money you had that you also expected to grow nicely .

so time frames are very unique to only you . how much you have at that time is going to be key .

it is all well and good the 1980's are known for the great bull market .

but the time frames leading up sucked . it was near impossible for most of us to grow a thing , inflation was double digits and markets sucked for 20 years .

so all well  and good the party started , but who had much money invested , certainly not me .


so discussing time frames without discussing where you are in your cycle and amount is silly . it is as silly as discussing index returns when your own portfolio has different buy in times , has money added at different buy in prices  , may be sold at different times or  is rebalanced , has different tax structure , etc .

[mathjak107]

so lets look at the real facts and not myth and folklore passed from one ill-informed person to another.

want to know what the actual results were over the worst 30 year periods ever ?

suppose you were so unlucky to retire in one of those worst time framess ,what would your 30 year results look like :

1907 stocks returned 7.77% -- bonds 4.250-- rebalanced portfolio 7.02- - inflation 1.64--

1929 stocks 8.19% - - bonds 1.74%-- rebalanced portfolio 6.28-- inflation 1.69--

1937 stocks 10.12 - - bonds 2.13 - rebalanced portfolio -- 7.24 inflation-- 2.82

1966 stocks 10.23 - -bonds 7.85 -- rebalanced portfolio 9.56- - inflation 5.38

for comparison the 140 year average's were:

stocks 8.39--bonds 2.85%--rebalanced portfolio 6.17% inflation 2.23%

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

so lets look at the first 15 years in those time frames determined to be the worst we ever had.

1907--- stocks minus 1.47%---- bonds minus .39%-- rebalanced minus .70% ---inflation 1.64%

1929---stocks 1.07%---bonds 1.79%---rebalanced 2.29%--inflation 1.69%

1937---stocks -- 3.45%---bonds minus 3.07%-- rebalanced 1.23%--inflation 2.82%

1966-stocks minus .13%--bonds 1.08%--rebalanced .64%-- inflation 5.38%

it is those 15 year horrible time frames that the 4% safe withdrawal rate was born out of since you had to reduce from what could have been 6.50% as a swr down to just 4% to get through those worst of times.

while 6.50% to 4% does not sound like a lot 1 million at 4% is an initial draw rate of 40k , at 6.50% you could have had 65k . that is a whopping 60% more .

so what it boils down to is any time you fall below a 2% real return average over the first 15 years you run the danger of 4% not holding for 30 years .

you will need a higher real return to go out longer in years but i can't say what it is ..

[nereo]

so lets look at the real facts and not myth and folklore passed from one ill-informed person to another.

...there's no need to be a jerk about it mathjack107; all of the responses so far have tried to help the OP understand how returns may be substandard, even negative for over a decade yet the 4% rule holds most of the time.

so what made those time frames the worst ? what made them the worst is the fact in every single retirement time frame the outcome of that 30 year period was determined not by what happened over the 30 years but the entire outcome was decided in the first 15 years.

This is true. Another very good 'spot' check is after the first 6 years. For all historical 30 year periods ('simulations') that ran out of money, all had portfolio values that were below the starting balance 6 years out.  To be clear, not every time period that had a reduced balance at year 6 wound up failing - some of them recovered.  But the early years are a great indication if you need to be worried.

+1 to arebelspy's suggestion of reading JL Collin's stock series.  If you really want to get into the minutia of the the so-called "4% rule" you can read the original trinity study (note: it's written by and for economists).

[Jamese20]

Interesting so the worst 30 years In history have been 9% average returns roughly?

Promising and gives me confidence

[ooeei]

But who the hell invests only once and then leaves it for 15 years?  This forum is about saving and investing constantly.  The point of regular investing is that even if a 'crash' happens, you'll actually benefit in the long term because you'll then start making your new investments at the new lower prices, when the price recovers you'll have more shares and more capital than if the price stayed flat and the crash never happened.  When the price goes to new highs you will actually have a crapload of money, not the flat return the index has made over that time because you have been buying at every price point along the way, automatically averaging down into every dip, automatically getting more shares per $$ when prices are cheap and buying less shares per $$ when prices are expensive.  You don't even have to think about it.

why 15 years ?

well suppose you were me and by year 2000 i accumulated a nice healthy balance . so you went to sleep for 15 years and expected to wake up seeing average long term returns compounding on your EXISTING MONEY  .

well you wake up 15 years later and while all the new money you had added on auto pilot while sleeping  has grown nicely , you are like WTF ,  looking at that big pile of existing money you had that you also expected to grow nicely .

so time frames are very unique to only you . how much you have at that time is going to be key .

it is all well and good the 1980's are known for the great bull market .

but the time frames leading up sucked . it was near impossible for most of us to grow a thing , inflation was double digits and markets sucked for 20 years .

so all well  and good the party started , but who had much money invested , certainly not me .


so discussing time frames without discussing where you are in your cycle and amount is silly . it is as silly as discussing index returns when your own portfolio has different buy in times , has money added at different buy in prices  , may be sold at different times or  is rebalanced , has different tax structure , etc .

Except that money that you're so bummed about already grew a TON by 2000, so it's probably still doing pretty well.  For example, if some of it was invested in 1995 it had already grown by 206%.  Now you've hit a "meh" streak, but your money is still WAY up.

It seems like you're just bummed there was a peak in 2000.  Any time you pick a peak and measure from there, your returns aren't going to be great.  Yes, if you'd decided to retire in 2000 you'd be in a less than ideal position right now, but the 4% rule is still holding out for your money to last 30 years.  If you reduced expenses a bit or picked up a little more income, you'd be doing just fine.  If you'd retired in 2002 or 1998 you'd also be doing pretty well.  It just so happens that the turn of the millennium is a common place to measure from because there are 3 zeroes at the end of it, it also happened to be a historic peak/bust in the market.

The 4% rule is pretty conservative, and basically guarantees your money will last 30 years.  If you want it to last longer than that, you can either roll the dice that you won't retire at a historic peak, or you can adjust your strategy a bit.

[nereo]

Interesting so the worst 30 years In history have been 9% average returns roughly?

Promising and gives me confidence

Note quite... :-)

"Real returns" (returns adjusting for inflation) over 30 year periods have averaged about 7%; the lowest (worst) returns ever for a 30 year period was 3.2%/year and the highest was 10.2%/year.

BTW, whenever we're talking about time frames that are >5 years we tend to talk in inflation adjusted terms (e.g. 'real returns' or 'inflation adjusted withdraws).  the 4% WR strategy assumes that you increase the amount you withdraw every year to inflation, so your spending power is the same in 2036 as it is in 2016.

[Spitfire]

A market crash just before your planned FIRE can put a damper on things, but is still survivable in most of the cases. If it happens to me I will likely stick out an extra year or two of work and invest at the lower prices, then FIRE off as things recover.

[Jamese20]

the key message i am getting here from you guys is just to invest constantly and dont worry as even the worse times you can receive +3%?? and that is if you invested all at once??

let me know your thoughts

[mskyle]

the key message i am getting here from you guys is just to invest constantly and dont worry as even the worse times you can receive +3%?? and that is if you invested all at once??

let me know your thoughts

Well, what's your alternative suggestion? Yeah, you might not get good returns. You might even lose money. But all investing involves risk.

Even if you bury cash money in the backyard you're taking on risk (mostly from inflation but also maybe groundhogs or raccoons). You could get burned investing in the stock market. You could get burned investing in real estate. You could get burned investing in a small business.

I invest in the stock market via index funds because at least it's easy.

[nereo]

the key message i am getting here from you guys is just to invest constantly and dont worry as even the worse times you can receive +3%?? and that is if you invested all at once??

let me know your thoughts

Yes, if you accept the premise that the future will be no worse than our worst economic periods of the last 120 years* then the market will return on average at least 3% per year over the next few decades.  If the next few decades are 'about the same' as the previous century then average annual real returns will be about 7% per year.

To be very clear, there will be years when the market goes way down (the biggest 1 year drop in hte last 50 years was -37% in 2008).  There will be other years when it goes way up (biggest calender year gain was +37.8% in 1995).

Time period is very important here.  One year drops happen (roughly 1/3 of the time).  Five year drops happen occasionally (1/5).  Even 10 year drops have occurred, albeit very infrequently (1/10).  We've yet to have a 20 year period where stocks did not give us a positive return after inflation. 

[Jamese20]

the key message i am getting here from you guys is just to invest constantly and dont worry as even the worse times you can receive +3%?? and that is if you invested all at once??

let me know your thoughts

Well, what's your alternative suggestion? Yeah, you might not get good returns. You might even lose money. But all investing involves risk.

Even if you bury cash money in the backyard you're taking on risk (mostly from inflation but also maybe groundhogs or raccoons). You could get burned investing in the stock market. You could get burned investing in real estate. You could get burned investing in a small business.

I invest in the stock market via index funds because at least it's easy.

i like the idea of real estate because even if prices drop you still make money every month as passive income? and to be honest the only decent thing to invest in other than stock market is property in my country - its all we really have these days

i will invest in my 100% equitys lifestrategy fund as much as i can and maybe start to take some out to buy property i think

[ooeei]

the key message i am getting here from you guys is just to invest constantly and dont worry as even the worse times you can receive +3%?? and that is if you invested all at once??

let me know your thoughts

Well, what's your alternative suggestion? Yeah, you might not get good returns. You might even lose money. But all investing involves risk.

Even if you bury cash money in the backyard you're taking on risk (mostly from inflation but also maybe groundhogs or raccoons). You could get burned investing in the stock market. You could get burned investing in real estate. You could get burned investing in a small business.

I invest in the stock market via index funds because at least it's easy.

i like the idea of real estate because even if prices drop you still make money every month as passive income? and to be honest the only decent thing to invest in other than stock market is property in my country - its all we really have these days

i will invest in my 100% equitys lifestrategy fund as much as i can and maybe start to take some out to buy property i think

Even if stock prices drop you still get dividends as passive income (depending on the particular stocks that is).

Don't forget with real estate you can have fires, flooding, terrible tenants, etc etc.  There's downsides and upsides to everything.  Real estate is more work than stocks, but can make you a lot of money if you know what you're doing.

[zombiehunter]

Two Questions for you guys that seems relevant to the thread.

First -- Most of the discussion here has been around the 4% SWR over 30 years, and then reducing the window to consider the first 15 years as the "critical phase".

What if the timeline is extended out to 50 years?  An early retiree like MMM or someone around here might save enough to retire by age 35, and expect to live to 80 something years, which requires a portfolio to sustain for 50 years (lets ignore social security and side income).

Does stretching out the timeline from 30 to 50 years provide a portfolio benefit (longer time to earn returns, longer period to weather market downturns, etc.) or detriment (portfolio must last longer so withdrawal rate must be more conservative)?

Second -- if the first 10 to 15 years post FIRE are the critical phase for determining long term portfolio viability, would it not make more sense to shift to a conservative equities-bonds ratio during that window, and then open it up to something more aggressive after 10 to 15 years?  For example, 60/40 for 10 years to limit any losses (would also necessarily put a cap on gains), and then shifting to a 80/20, 90/10 or all equities?

[nereo]

Two Questions for you guys that seems relevant to the thread.

First -- Most of the discussion here has been around the 4% SWR over 30 years, and then reducing the window to consider the first 15 years as the "critical phase".

What if the timeline is extended out to 50 years?  An early retiree like MMM or someone around here might save enough to retire by age 35, and expect to live to 80 something years, which requires a portfolio to sustain for 50 years (lets ignore social security and side income).

Does stretching out the timeline from 30 to 50 years provide a portfolio benefit (longer time to earn returns, longer period to weather market downturns, etc.) or detriment (portfolio must last longer so withdrawal rate must be more conservative)?

Second -- if the first 10 to 15 years post FIRE are the critical phase for determining long term portfolio viability, would it not make more sense to shift to a conservative equities-bonds ratio during that window, and then open it up to something more aggressive after 10 to 15 years?  For example, 60/40 for 10 years to limit any losses (would also necessarily put a cap on gains), and then shifting to a 80/20, 90/10 or all equities?

1) you can look at time periods longer than 30 years, either by bootstrapping or by extending simulation period (which results in a smaller sample size).  Briefly, you will see a slight increase in failures if you leave everything else the same (for example, success can go from ~95% to about 84%).  However, often other factors like SS will come into play, drastically effecting the outcome. 
Short answer:  Longer time lines are slightly more risky than shorter ones if we assume nothing else changes

2) Including a higher percentage of bonds in the first 10-15 years will make it less likely to survive, not more.  Bonds reduce volatility but also (generally speaking) reduce the overall average returns by a point or two.

Strategies with a far greater impact include reducing expenses during down periods (as little as a 20% reduction in expenses during bear markets can have a huge impact), and/or earning some income (again, as  little as earning 20%).  Likewise, a WR of 3.5% has never failed (and a 5% WR succeeds more than half the time).  There are literally dozens of strategies for boosting one's success ratio.

[neil]

If you look at the returns between any two points in time, the data can look awesome or terrible.  But in real life a regular joe isn't likely to be dumping all of his savings in at one period in time (though I certainly wish I could have gotten an advance on ten years worth of income and lumped it in!) and then selling it all at one time.  You'll be making minor deposits and withdrawals over the course of your lifetime, and this behavior ends up acting like a form of diversification in itself.  Some individual dollars may perform poorly (and yes, those dollars today may not) but over time, you'll have hundreds of entry points with different return profiles.  When you take those withdrawals, you'll take tiny pieces of each of those purchases and "lock in" those returns at hundreds of entry points.  Despite the 4% rule, if you take 4% and do this, more likely than not you will still be rich towards the end of your life.

I am certain there are people who retired that put dollars in at the 2000 peak and withdrew at the 2009 bottom.  Those dollars certainly had terrible performance, but many of their other dollars have probably done great.  (Having said that, there's no arguing that someone who retired on the 4% rule in 2000 are on the path to a weaker retirement than normal - but it is still not the historically worst performance.)

Real estate is a great diversification because it can (through research) perform as well as stocks but with a much different behavior.  But the return profile of your real estate may look more like the returns on individual stocks as there are more specific risks (local market, building performance?) with each location.  Rents in those locations may not grow at the same rate as your personal inflation rate, and it is more difficult to live off the equity as easily as you can with stocks.

[Jamese20]

i am not sure i should be as concerned about it personally thinking about it

i have my work based pension which i contribute 7% and my employer contributes 12% all tax free lumps every month - thats maxed out

I also pay 125 quid a month before tax into a 2:1 share scheme every month

then there is also the state pension at 70 of 125 a week i believe these days

my FI plan is purely based on my savings rate outside all of the above and i am looking to now invest 30% of this into equities until i can reach at least 50% after paying off non interest debts. 17 years it will take me roughly but this is based on having the same income and assuming i keep the same costs

not a bad plan?

[nereo]

not a bad plan?

It sounds like you are on a solid path.  If you'd like more constructive feedback, consider doing a full case study.

[arebelspy]

Two Questions for you guys that seems relevant to the thread.

First -- Most of the discussion here has been around the 4% SWR over 30 years, and then reducing the window to consider the first 15 years as the "critical phase".

What if the timeline is extended out to 50 years?  An early retiree like MMM or someone around here might save enough to retire by age 35, and expect to live to 80 something years, which requires a portfolio to sustain for 50 years (lets ignore social security and side income).

Does stretching out the timeline from 30 to 50 years provide a portfolio benefit (longer time to earn returns, longer period to weather market downturns, etc.) or detriment (portfolio must last longer so withdrawal rate must be more conservative)?

Second -- if the first 10 to 15 years post FIRE are the critical phase for determining long term portfolio viability, would it not make more sense to shift to a conservative equities-bonds ratio during that window, and then open it up to something more aggressive after 10 to 15 years?  For example, 60/40 for 10 years to limit any losses (would also necessarily put a cap on gains), and then shifting to a 80/20, 90/10 or all equities?

In the vast majority of cases, a 4% WR over 30 years leaves you with way more money than you started.

If you don't succumb to lifestyle inflation, 50 years won't matter, because your spending starts at 4%, and you increase it with inflation, but your portfolio grows faster than inflation, so then your WR drops to 3.5%, then 3%, then 2%, etc.

Those first 10-15 years are crucial in the 50 year part, too, because they're a time for your portfolio to grow, and weather the future storms easily.  That's the answer to your first question--those first 10-15 years are still quite crucial.

As to the second, if you handicap your portfolio on that initial growth, in the 30 year timeframe it may not be as bad, because you only have 15 more years to get through.  In the 50 year one, you still have 35(!) years to get through, after that first 15.  Going more conservative when shooting for a 50 year timeframe may mean you weather the initial 10-15 year storms, but are in a much worse place to weather the later ones.

I'd rather be flexible with spending and earn a bit more (in those 10-15 years) than go with a more conservative portfolio (which may not make it).

Did that make sense?  Not sure if I started rambling there.   :)

[Jamese20]

sounds good to me,

the extra work bit is interesting and i am not sure if i ever want to work again if i become FI - so if i retire i really do want my time to myself... i would like to make income but i foresee that being in property and not "working"

i cant think of any part time work other than doing something online maybe - but would have no idea where to start

[AlmstRtrd]

I guess I just don't see what is going to drive stock prices higher over the next decade or two. Someone posted this piece by Warren Buffett on another thread a couple of weeks back:

http://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

In part he wrote:

"Let me come back to what I said earlier: that there are three things that might allow investors to realize significant profits in the market going forward. The first was that interest rates might fall, and the second was that corporate profits as a percent of GDP might rise dramatically. I get to the third point now: Perhaps you are an optimist who believes that though investors as a whole may slog along, you yourself will be a winner. That thought might be particularly seductive in these early days of the information revolution..."

But the whole article is worth reading especially because we now have the advantage of hindsight and can see what actually unfolded. It's worth noting that this piece appeared on 11/22/1999. Buffett essentially "called" the poor overall performance of stocks from that point until today (what mathjak is referring to with his figure of roughly a 2% annual returns over the last 17 years or so).

Assuming Buffett knows (knew) what he is talking about, I think we need to ask what is likely to really drive stock prices higher. Lower interest rates? Greater productivity?

I just don't see what there is to be really optimistic about and therefore expect paltry equity returns. But I'm happy to hear what others have to say.

[mathjak107]

Two Questions for you guys that seems relevant to the thread.

First -- Most of the discussion here has been around the 4% SWR over 30 years, and then reducing the window to consider the first 15 years as the "critical phase".

What if the timeline is extended out to 50 years?  An early retiree like MMM or someone around here might save enough to retire by age 35, and expect to live to 80 something years, which requires a portfolio to sustain for 50 years (lets ignore social security and side income).

Does stretching out the timeline from 30 to 50 years provide a portfolio benefit (longer time to earn returns, longer period to weather market downturns, etc.) or detriment (portfolio must last longer so withdrawal rate must be more conservative)?

Second -- if the first 10 to 15 years post FIRE are the critical phase for determining long term portfolio viability, would it not make more sense to shift to a conservative equities-bonds ratio during that window, and then open it up to something more aggressive after 10 to 15 years?  For example, 60/40 for 10 years to limit any losses (would also necessarily put a cap on gains), and then shifting to a 80/20, 90/10 or all equities?

In the vast majority of cases, a 4% WR over 30 years leaves you with way more money than you started.

If you don't succumb to lifestyle inflation, 50 years won't matter, because your spending starts at 4%, and you increase it with inflation, but your portfolio grows faster than inflation, so then your WR drops to 3.5%, then 3%, then 2%, etc.

Those first 10-15 years are crucial in the 50 year part, too, because they're a time for your portfolio to grow, and weather the future storms easily.  That's the answer to your first question--those first 10-15 years are still quite crucial.

As to the second, if you handicap your portfolio on that initial growth, in the 30 year timeframe it may not be as bad, because you only have 15 more years to get through.  In the 50 year one, you still have 35(!) years to get through, after that first 15.  Going more conservative when shooting for a 50 year timeframe may mean you weather the initial 10-15 year storms, but are in a much worse place to weather the later ones.

I'd rather be flexible with spending and earn a bit more (in those 10-15 years) than go with a more conservative portfolio (which may not make it).

Did that make sense?  Not sure if I started rambling there.   :)

keep in mind the 4% rule was never a rule nor was it meant to be one . it was only a study on what it took not to run out of money using laboratory conditions for comparison . no human spending patterns or human intervention is considered . nor is life expectancy .

combining a 90% success rate with the statistical probability of that theoretical person surviving 30 years in retirement actually boosts the success rate since odds are in those conditions the retiree modeled will not live 30 years .

30 years was picked because the typical retirement at the time was 65-95 with very few making it to 95 .

so 90% or even a bit less was actually very successful .

but all bets are off when looking at longer retirement time frames . i firecalc goes out pretty far in years but the wild card is medical and long term care costs . they can eat up a whole load of money at the 5.50% increases they have been seeing and are expected to see .

i know our insurance costs up about 12k a year  today  with no dental ,vision or hearing aids  not including any long term care  planning . this is all in after tax dollars too . i am on cobra as i am to young for medicare and my wife gets medicare and a supplement .

[Jamese20]

christ folks,

when i feel confident about it one of you takes it away!! :)

i guess its worth doing regardless in my 12-15 years of saving period because if market crashed im buying at those lower prices..

having said all this my fund im about to invest was up +15% last year so this is promising that these type of numbers are still being achieved

[zombiehunter]

Two Questions for you guys that seems relevant to the thread.

First -- Most of the discussion here has been around the 4% SWR over 30 years, and then reducing the window to consider the first 15 years as the "critical phase".

What if the timeline is extended out to 50 years?  An early retiree like MMM or someone around here might save enough to retire by age 35, and expect to live to 80 something years, which requires a portfolio to sustain for 50 years (lets ignore social security and side income).

Does stretching out the timeline from 30 to 50 years provide a portfolio benefit (longer time to earn returns, longer period to weather market downturns, etc.) or detriment (portfolio must last longer so withdrawal rate must be more conservative)?

Second -- if the first 10 to 15 years post FIRE are the critical phase for determining long term portfolio viability, would it not make more sense to shift to a conservative equities-bonds ratio during that window, and then open it up to something more aggressive after 10 to 15 years?  For example, 60/40 for 10 years to limit any losses (would also necessarily put a cap on gains), and then shifting to a 80/20, 90/10 or all equities?

1) you can look at time periods longer than 30 years, either by bootstrapping or by extending simulation period (which results in a smaller sample size).  Briefly, you will see a slight increase in failures if you leave everything else the same (for example, success can go from ~95% to about 84%).  However, often other factors like SS will come into play, drastically effecting the outcome. 
Short answer:  Longer time lines are slightly more risky than shorter ones if we assume nothing else changes

2) Including a higher percentage of bonds in the first 10-15 years will make it less likely to survive, not more.  Bonds reduce volatility but also (generally speaking) reduce the overall average returns by a point or two.

Strategies with a far greater impact include reducing expenses during down periods (as little as a 20% reduction in expenses during bear markets can have a huge impact), and/or earning some income (again, as  little as earning 20%).  Likewise, a WR of 3.5% has never failed (and a 5% WR succeeds more than half the time).  There are literally dozens of strategies for boosting one's success ratio.

+Neil +arebelspy +mathjak

Thanks for your responses.  Based on the feed back, it sounds like there's too much concern over portfolio optimization, with less consideration of  spending optimization, side jobs/semi-ER, etc. that may have a bigger impact. 

I'd be happy to hear additional strategies for boosting success chances of a portfolio.  The goal is to stretch either 90/10 equities to bonds or all equities portfolio over a 50 year horizon, made of a combination of tax-advantaged accounts and taxable accounts, plus with the ability to reduce spending as needed in downturns and the ability to earn side income (either to supplement withdrawals or even better to fund equities purchases when markets are down).  Other than reducing spending and earning income, what other strategies are effective?  Seems like most other options are derivative of one of these (e.g. 'grow your own food' and other DIY is basically just a spending reduction). 

There's some strategery to get more out of social security (earning credits and delaying withdrawals) and tax optimization for ROTH / HSA accounts (re-characterization and saving qualified medical expenses for down the road tax-free withdrawals).  A long term mortgage locked in at a fixed interest rate is probably beneficial (queue debate) due to the interest deduction but maybe not that beneficial given the low tax bracket post-FIRE (basically just side income, taxable account dividends, and recharacterizations). 

Any other ideas?

[TheAnonOne]

It was brushed upon here but I don't think emphasized enough..

If you look at 2000 to now, the returns were overall poor(ish) but that is a non-realistic view. You would have had purchased once a month from 95' to 16' and your returns would have had been great! You would have gotten all the low points of 95', 02'-04', and 09'-12' and made a killing. This is why it works.

When we say, oh, from 2000 to now, it's shitty. It is unfairly taking a PEAK of a BUBBLE and assuming that to be realistic. When, assuming someone lump summed everything they owned, had done it at literally any of the 5 years before or AFTER they would have been great.

[AlmstRtrd]

It was brushed upon here but I don't think emphasized enough..

If you look at 2000 to now, the returns were overall poor(ish) but that is a non-realistic view. You would have had purchased once a month from 95' to 16' and your returns would have had been great! You would have gotten all the low points of 95', 02'-04', and 09'-12' and made a killing. This is why it works.

When we say, oh, from 2000 to now, it's shitty. It is unfairly taking a PEAK of a BUBBLE and assuming that to be realistic. When, assuming someone lump summed everything they owned, had done it at literally any of the 5 years before or AFTER they would have been great.

Fair enough. It was really only crappy if you put in a lump sum right at the beginning of the century. But I question what is likely to drive stock prices much higher over the next decade or two. I just think returns will be puny based on where valuations are now, interest rates, declining middle class, etc. And I'm not saying that there won't be some great years in there... just that overall the outlook for stocks doesn't seem great. Just my two cents worth, obviously.

[TheAnonOne]

It was brushed upon here but I don't think emphasized enough..

If you look at 2000 to now, the returns were overall poor(ish) but that is a non-realistic view. You would have had purchased once a month from 95' to 16' and your returns would have had been great! You would have gotten all the low points of 95', 02'-04', and 09'-12' and made a killing. This is why it works.

When we say, oh, from 2000 to now, it's shitty. It is unfairly taking a PEAK of a BUBBLE and assuming that to be realistic. When, assuming someone lump summed everything they owned, had done it at literally any of the 5 years before or AFTER they would have been great.

Fair enough. It was really only crappy if you put in a lump sum right at the beginning of the century. But I question what is likely to drive stock prices much higher over the next decade or two. I just think returns will be puny based on where valuations are now, interest rates, declining middle class, etc. And I'm not saying that there won't be some great years in there... just that overall the outlook for stocks doesn't seem great. Just my two cents worth, obviously.

Automation,
Robotics,
Bio-Medical,
Green Tech,
AI

These are just off of my head... The world is FAR from stagnating.

[AlmstRtrd]

It was brushed upon here but I don't think emphasized enough..

If you look at 2000 to now, the returns were overall poor(ish) but that is a non-realistic view. You would have had purchased once a month from 95' to 16' and your returns would have had been great! You would have gotten all the low points of 95', 02'-04', and 09'-12' and made a killing. This is why it works.

When we say, oh, from 2000 to now, it's shitty. It is unfairly taking a PEAK of a BUBBLE and assuming that to be realistic. When, assuming someone lump summed everything they owned, had done it at literally any of the 5 years before or AFTER they would have been great.

Fair enough. It was really only crappy if you put in a lump sum right at the beginning of the century. But I question what is likely to drive stock prices much higher over the next decade or two. I just think returns will be puny based on where valuations are now, interest rates, declining middle class, etc. And I'm not saying that there won't be some great years in there... just that overall the outlook for stocks doesn't seem great. Just my two cents worth, obviously.

Automation,
Robotics,
Bio-Medical,
Green Tech,
AI

These are just off of my head... The world is FAR from stagnating.

I guess my take is that things like automation and robotics will make a few people wealthy but they won't drive growth in the overall economy which is what stocks need. Stocks do best when there is a huge base of folks who have more money than they need for the foreseeable future.

They can also benefit greatly from gradually falling interest rates but there's not a lot of room to go on that side of the equation.

But hopefully you are right and I am wrong.

[nereo]

I guess my take is that things like automation and robotics will make a few people wealthy but they won't drive growth in the overall economy which is what stocks need. Stocks do best when there is a huge base of folks who have more money than they need for the foreseeable future.

They can also benefit greatly from gradually falling interest rates but there's not a lot of room to go on that side of the equation.

But hopefully you are right and I am wrong.

Automation and mechanization (plus population growth) have been a core driver of macroeconomics for the last 200+ years (previously referred to as the 1st and 2nd industrial revolutions). There's a lot of debate about whether we've entered a 'third' revolution with the digital world.

Adding to this, both globally and domestically (at least in the US) our populations continue to expand, yet there are literally billions of people who live in extreme poverty and have yet to join what we'd call the modern economy.  ~99% of people globally earn <$35k/year.  Roughly half a billion people are expected to join the middle class globally in the next 25 years. All those people are going to be buying things.

[zz_marcello]

It was brushed upon here but I don't think emphasized enough..

If you look at 2000 to now, the returns were overall poor(ish) but that is a non-realistic view. You would have had purchased once a month from 95' to 16' and your returns would have had been great! You would have gotten all the low points of 95', 02'-04', and 09'-12' and made a killing. This is why it works.

When we say, oh, from 2000 to now, it's shitty. It is unfairly taking a PEAK of a BUBBLE and assuming that to be realistic. When, assuming someone lump summed everything they owned, had done it at literally any of the 5 years before or AFTER they would have been great.

Fair enough. It was really only crappy if you put in a lump sum right at the beginning of the century. But I question what is likely to drive stock prices much higher over the next decade or two. I just think returns will be puny based on where valuations are now, interest rates, declining middle class, etc. And I'm not saying that there won't be some great years in there... just that overall the outlook for stocks doesn't seem great. Just my two cents worth, obviously.

Automation,
Robotics,
Bio-Medical,
Green Tech,
AI

These are just off of my head... The world is FAR from stagnating.

I guess my take is that things like automation and robotics will make a few people wealthy but they won't drive growth in the overall economy which is what stocks need. Stocks do best when there is a huge base of folks who have more money than they need for the foreseeable future.

They can also benefit greatly from gradually falling interest rates but there's not a lot of room to go on that side of the equation.

But hopefully you are right and I am wrong.

During the last 150 years, the majority of people had the opinion that there will be no more growth and no more jobs and no more possibilities. Because of the current move into automatisation and artificial intelligence, many boring jobs will be obsolete in the next few years but many new possibilities and jobs will develop. I'm extremely bullish for the world, for my kids and also for the US. Nowadays people can, for example, make more money with a blog than as a director in a big corporation. That means valuable information and knowledge will be paying extraordinary well. We are living in the best moment of the history of mankind and the US is on top of that still one of the very best countries to be.

Have a nice day!

[MOD EDIT: Spam link removed. Please see forum rules on linking your site (add to signature).] 

[Radagast]

It's been said before in this thread, but if you put $10,000 into the Vanguard Total Stock Market Index Fund in January 2000 you have since received an annualized return of 4.77%, per Portfolio Visualizer.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2000&firstMonth=1&endYear=2016&lastMonth=12&endDate=08%2F03%2F2016&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTSMX&allocation1_1=100

If you started with $10,000 and added $1,000 per month, you received an internal rate of return on your investments of 6.28%!
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2000&firstMonth=1&endYear=2016&lastMonth=12&endDate=08%2F03%2F2016&initialAmount=10000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTSMX&allocation1_1=100

That's the amazing thing about making continuous regular contributions: you are mathematically guaranteed to receive a higher annualized return on your money than the market's total gains over the period. To me, that's indistinguishable from magic.

(That doesn't necessarily mean you should spread a lump sum investment out over a period of time, which will generally end in less money. It means that if you are forced to invest over a long period of time your money will be invested very efficiently.)

[mathjak107]

no way are you guaranteed to have a higher value buying in over time .

that is extremely time frame dependent .

in most cases dollar cost averaging in left you behind a lump sum .  the y2k  decade was an exception because we had two back to back recessions , other wise  with markets usually up 2/3's of the time and down 1/3' you would be wrong trying to spread out buying in .

cherry picking 2000 as a judgement date is not cherry picking if it was your money that hit a wall .

as i said it was all well and good the 80's brought the party home to investors , but the years leading up sucked .

so basically we first started saving when the party started . we really did not accumulate much yet  early on in the bull market  so by the end of the 1990's your balance started to get some traction .

now that you finally accumulated enough to matter and grow , BANG  , that money hit a brick wall in 2000 with way below average real returns .

so  from 2000 to the end of  2015 we  saw less then a 2% real return  if you go by completed years on our balances up to that point . that   may not  mean much or anything to you , but  for us older investors  our older money  grew far less then expectations and goals were . that money saw very tepid real return growth 

new money did fine but the old money was a snails pace .


depending how much old money you had that time frame was  very key to your goal meeting .