The 1990’s delivered one of the best decades for investors. It allowed many investors to quickly reach their retirement number. That is, they had enough invested in their portfolios to hopefully create income that could last for 3 or 4 decades. But along came the year 2000 and the start of one of the worst market corrections in history. U.S. stocks were down for 3 years in a row, while Canadian stocks were down for two consecutive years. What happened to retirees who held a balanced portfolio? We’re retiring during the dot-com crash on the Sunday Reads.
In the Globe & Mail (sub required) Norman Rothery offered an interesting chart on how the 4% rule held up during the worst stock market correction of our lifetime. The 4% “rule” is a staple study or guideline for retirees showing the success rate for a traditional balanced portfolio. On that, think a 50% to 60% allocation to stocks with the rest in bonds. A U.S. asset(s) balanced portfolio will (historically) be able to deliver a 4.2% spend rate each year, with an increase each year to reflect the added costs due to inflation.
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From that post, here’s the telling chart. While the original 4% rule studies used U.S. assets, Norm used Canadian stocks (XIC.TO) and Canadian bonds (XBB.TO).
Norm suggests that barring any tragedy, the portfolio will make it, alive in 2030. But that’s cutting it close. Any big near-term correction would likely create an F for the 4% rule from a year 2000 start date.
Stocks were too much of a good thing
And for context, here’s what happened to the all-equity retiree.
That’s a dead portfolio limping in 2024. It failed.
Forget the math, it’s about emotions
Right on cue there was another killer post in the Globe on how retirees don’t spend enough, due to low risk tolerance and perhaps being unaware of how sustainable retirement portfolio spending works.
The article references a 2021 study, but it’s worth a re-hash in 2024.
They found retirees consistently spend approximately 75 per cent of what they could afford to based on available assets, with underspending increasing as retirees get older. Yet, they also found that after controlling for different levels of wealth, retirees with a larger proportion of guaranteed income spent more each year than retirees with a larger proportion of investments.
Retirees on average will turn that 4% rule into the 3% rule. And take note that those with more defensive portfolios find it easier to spend more. While we need growth in the portfolios the study suggests that the more you pensionize your nest egg, the better. Retirees need to feel safe to spend.
If we go back to the first chart in this post, how many retirees would be comfortable spending at a rate well above 4% of the portfolio value (remember we adjust for inflation and the portfolio is decimated) in 2009? The spend rate on a portfolio that is under $500,000 is considerably more than on a $1,000,000 portfolio. Who would be comfortable spending when the porfolio is down 40% in 2003? I’d suggest almost no one.
And most financial planners suggest that you’d be wise to then employ a variable withdrawal strategy. We pull back on spending a bit (even 20% or so) during major corrections. We can spend more during the bull market runs.
Eliminate that sequence risk in retirement
Of course you can eliminate that sequence risk (and emotional risk) by entering retirement with very conservative portfolios. A severe stock market correction can’t upset your retirement plans as your initial retirement years are funded by safer assets such as cash, bonds, GICs and annuities.
Here’s why retirees hold bonds, cash and GICs.
That ‘safer portfolio stuff’ is supplemented by more safe stufff such as pensions and government programs such as CPP and OAS.
I also like the defensive sectors for retirement.
Of course, we still need growth to allow for increased spending needs in the future, and we need to account for inflation. That de-risked retiree will likely need to rotate to more stocks over time – an equity glide path. Think of it as dollar cost averaging in retirement.
That said, the need for qrowth will be determined by your greater financial and cash flow plan. How much growth do you need to fund your spending needs? Every situation is unique. And you should find the answers to these questions.
Get a plan Stan
You can check in with a retirement specialist advice-only planner.
I will be back with a dedicated post on this de-risking strategy. There are papers published on the approach. It is shown to be superior to a static balanced portfolio approach. And keep in mind one would not sell all equity assets – they might transition to a balanced income model such as a 30% stock to 70% bond portfolio.
When do we enter the retirement risk zone?
Stay tuned for that post. And feel free to reach out on any of the above. Use that Contact Dale button.
If you want advice and planning (and low fee ETF portfolios) check out Justwealth.
More Sunday Reads
At Findependence Hub, more on the retirement theme – a look at retirement strategies and the journey to financial independence.
For the weekly wrap let’s dive in at Dividend Hawk. In the mix was a portfolio update from Mike The Dividend Guy.
At Banker on Wheels, you’ll always find a rich mix of podcasts and posts. And this week you’ll find why equities are the greatest asset class. They are the growth engines that build wealth and help maintain our retirement spending over longer periods. But we need to manage the volatilty. As the post notes, stocks decline:
- 10% every other year
- 30% every 4-5 years
- 50%+ once a generation
Types of people. Types of wealth.
Also from Banker, the two types of money people.
There are really only two types of people when it comes to money:
1. People who spend too much.
2. People who save too much.
This is an extreme overgeneralization and there are obviously people somewhere in the middle but you get the idea.
There are 5 types of wealth according to Fritz at the Retirement Manifesto.
- Financial Wealth
- Social Wealth
- Time Wealth
- Physical Wealth
- Eternal Wealth
That is a good framing of life and death, and another thoughtful post.
At My Own Advisor Mark looks at the stock market win-rate and more. On our CPP program in Canada …
The most recent triennial report by the Office of the Chief Actuary confirmed that the CPP is financially sustainable for at least 75 years.
Ther’s a portfolio and travel update (with pics) at Tawcan.
Stocktrades looked at the best places for Canadians to retire. The list includes domestic and foreign locales. And the post goes into some of the logistics of relocating. A popular and growing trend for many Canadians.
Loonies and Sense was back with more stock market visualization.
I learned this week that Nvidia alone is twice the market cap of the entire TSX Composite. That is astounding and fascinating.
Related post: How will AI power your portfolio?
I’ve got chips …
I put chips on the table for readers just after the launch of that ETF.
On MoneySense – the world runs on chips.
Semiconductors are the modern day commodity as I pointed out. I’ll have no problem topping up that ETF over the next few years. AI has delivered another gear. My 4-pack of TFSA growth drivers are working well, from chips to Uranium (HURA), Bitcoin and Canadian oil and gas (XEG).
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