The Wrong Way to Think About Your Retirement Portfolio

A comment came in yesterday about how long it might take to get back to even from this bear market. My hunch is that the market will retrace a big chunk of the decline from its bottom and then meander for a while - and yes, it could be a long time before the S&P 500 sees 1565 (not a prediction, more like something we should maybe brace for, and consider more foreign).

So here is a thought that might whip a few people up: How long it takes to get back to even is the wrong thing to think about.

The value of your portfolio today is what it is. It has either outperformed or lagged the market during this bear phase, but whatever the dollar amount - that is it. The day you start to draw income from it (or if you are taking income now) the value will be whatever it is. For someone drawing income now, the value a few years ago means nothing.

A 55 year old who wants to start taking an income in ten years will need to base that income on what he has then. If he has $800,000 ten years from now, then that is his reality. If three years before he draws money it was worth $650,000 or $950,000, he needs to base his withdrawal on $800,000 - not some high water mark from the past.

I think this circles back to my "whatever you got, 4%" rule about how much to take out every year. If you had $1 million one year, took out $40,000 and the portfolio lost 10% you now have $860,000 (simplistic math). If you take out the same $40,000 the next year and also had a 5% loss you now have $777,000 (again, simplistic math). Now $40,000 is more than a 5% drawdown, and the path to trouble is much easier to see.

Sticking to 4% (or more practically 1% of the value of your portfolio on the last day of the quarter) is problematic, because it means the income generated can fluctuate in such a way as to create a lot of uncertainty in the family budget. Obviously "whatever you got, 4%" is not perfect - but it beats running out of money.

I think it makes more sense to stick with a strategy of saving and maintaining the proper asset allocation, along with going on defense every now and then when market circumstances dictate. Right here right now is a little trickier. There is a balance to be struck between defense and not letting a massive rally that comes from nowhere that catches everyone by surprise happen without you.

My blog posts for the last couple of months have covered how I am trying to strike that balance, which is not easy. I would add that regardless of the fundamentals or whatever the bottom is or when it comes, after a greater than 40% decline, a massive rally that comes from nowhere and catches everyone by surprise would be far from a black swan.

Comments

[investor88:]

It is not easy. A big upswing can come but equally likely a big downswing to Dow 7k, 6k, 5k, 4k is possible. So one must make up one's mind, one can be wrong but still must make some basic survival decisions after carefully assessing the situation.

2008 Nov 18 08:40 AM

[bosun.j:]

The wrong way to think about your portfolio is that you will have a portfolio!

2008 Nov 18 09:11 AM

[MarvinMBA:]

There are no easy answers. Just take what you need and if you run out ask Uncle Sam to bale you out!!!!! Why not? You've paid into the system all your life and your just as entitled to a bail out as the multi millionaires.

2008 Nov 18 10:13 AM

[Roger Nusbaum:]

really? no portfolio? you really think it is all going to zero?


On Nov 18 09:11 AM bosun.j wrote:

> The wrong way to think about your portfolio is that you will have
> a portfolio!

2008 Nov 18 12:48 PM

[bosun.j:]

Roger:

Indeed. The 1930's are going to look like a Sunday school social in comparison.


On Nov 18 12:48 PM Roger Nusbaum wrote:

> really? no portfolio? you really think it is all going to zero?<br/>

2008 Nov 18 01:41 PM

[mollytjm:]

since people are living so much longer today, or at least might, it's very good advice to stick to a % of withdrawal that doesn't deplete the principle, if at all possible. a friend of mine, who has a very good job, said he didn't see why anyone needed more than a million dollars to retire on, so he is spending all the 'excess'. he's 55 now! trying to explain the shrinking nature of $ is hard, when people want to believe something else.

so that $800,000, even when taking constant %, will mean that person has to eventually scale down their standard of living unless there's some other inflow of cash. most people of moderate means will find they haven't nearly enough to live a retired life style. if you're reading this post, you may have a lot more...but in 30 years, it might be worth 1/3rd of what it's worth now, so plan accordingly in an economy where the cost of food, energy, and medical expenses will continue to climb, alarmingly.

when 65 was considered old, this wouldn't have been so much of a problem. but the entire picture has changed. if, as some medical researchers say, 120 won't be out of the question, soon, then 65 would be closer to middle age. think your retirement money will last 60 years?
it's something to really consider.

2008 Nov 19 11:11 AM

[kurt walter:]

My retirement portfolio is not going to zero. But, again, I don't plan on ever retiring. I might not work 60 hours per week, but I plan on always have something going on. I enjoy getting paid for work done. Stay active. Live a long, healthy life. Stay in the game to the very end.

2008 Nov 19 05:16 PM