So here is the dilemma
How well a retirement portfolio survives depends on two things:
A) The sequence of returns, especially in the early years. This is largely luck of the draw, because as we all know the predicting predicting selloffs and short term movements is the domain of EW practitioners and Youtube gurus. That said, the most difficult periods for markets typically happen from points of gross overvaluation and expectation, similar to conditions we saw in 2021. They are not totally random, they're just very difficult to nail the exact timing of.
B) The long term returns of the portfolio, provided it is not crippled by the first point
Overall, point A dominates, especially for timeframes of 30yrs or less which most of the research is based off. You can retire in an expensive market and still do absolutely fine provided you aren't unlucky enough to pick the very peak and still have a few years of good returns ahead, as often these extra years will see the portfolio exceed its starting point even account for the withdrawals being made. What you can't get away with is a horrific sequence straight off the bat, where, as a forced seller in a prolonged bear market, it leaves your capital base diminished to the point that overwhelm its ability to participate enough even when a recovery in the markets come.
Unfortunately, it does now look as if the Dec-2021 retiree pretty much drew the short straw and started their retirement at the point of the largest and most prolonged downturn since the explosion in FIRE popularity when prices and optimism were at their peak, and therefore vulnerability was at its highest. Bad luck, for sure, but that is sometimes how it goes.
Inflation is driving a lot of the narrative right now and why I think those Dec-2021 are going to be tested even further.
Bonds are still not cheap and not priced to deliver a positive real return. Economically they are still offering the unenticing prospect of return-free risk. That may change if inflation can be brough under control, however the latest inflation report is not promising - showing that core inflation is actually rising. As I said many times on various threads, inflation is a genie that once you let it out may prove far more difficult to put into the bottle than anyone predicts. If it were easy to keep inflation low, don't you thnk all these other economy that suffer persistently high inflation would just do it? We saw the first wave of inflation in "things" - good and raw materials, but next wave will come from wages demandsin response to the first wave and will be felt most keenly in "services"... they don't call it a wage-price spiral for nothing.
Stocks will continue to be repriced in response to bonds being repriced in response to inflation continuing to run and run. Its also inevitable that corporate earnings will fall too, although I suspect much of that will already be priced in by now (more so than inflation imo).
The 3rd point which isn't talked about very much here is the macro, and and the the Fed and US Government may actually be snookered and unable to raise interest rates to a point that would bring inflation under control. Yes, they are raising rates, but how far can they afford to raise them? We ain't in Kansas any more. The US's debt to GDP stands at 120% today. At the start of the stagflation era it stood at under 40%, and in the 1906-07 it was negligable due to being restricted by the gold standard In standard economic orthodoxy an interest rate below the rate of inflation is still a stimulatory rate - meaning we've been running accomodative monetary poily for most of the last 20 years and continue to do so even today. Under these conditions you disincentivise people to save, therefore it is unreasonble to assume that people will modify their behaviour while there is no incentive for them to reduce their consumption. Furthermore, when recession hits it a sure thing that tax receipts fall at the same time that public obligations tend to rise. The public finances tend to go south very quickly during such times - as I have already said debt/GDP is at an eyewatering 120% already... who knows what they will demand from the issuer if that number gets pushed higher at a time when your prospects look worse.
For better or worse, a lot of growth of financial assets in the last 20 years has been due to financial engineering and low interest rates rather than in real productivity gains. When you can borrow at 2-3% and put into a project with an anticipated return of 5% then companies will do that to increase their earnings. When borrowing costs are 5 or 6%, none of those previous projects are viable and you need a much higher return on capital to justify the go ahead - but all that low hanging fruit is long gone. That era of disinflation that made it so easy for corporations to continually grow earnings is now gone.
