We’re coming to the end of one of the greatest retirement periods in American history. The consensus seems to be that the next few decades are going to be a bit grimmer for retirees, with lower stock returns and lower bond rates. But looking at the historical record shows just how unprecedented recent retirements have been.
Retirements that began in 1980–1985 form 6 of the 10 best retirement spans in American history. A 1982-retiree could sustainably withdraw 9.2% every single year for 35 years. An amount that seems staggering upon reflection, especially when we remember that we often plan on a 4% Safe Withdrawal Rate.
That 1982 retiree might have planned on spending $40,000 every year to make his portfolio last but actually could have spent $92,000 and still been safe.
If those are 6 of the top 10…what are the other 4?
The Rest of the Best
1920, 1921, 1922, and 1877.
The 1920–1922 period is a bit of a surprise since it meant you’re retired in the middle of the Great Depression. How did the still work out so well? Why do I say that 1921 is the best overall? And what’s up with 1877?!?
The 1920–1922 period does so well for two reasons.
The run up to Great Depression increased the portfolio value substantially. By the time the Great Depression kicked in a $1,000,000 portfolio had almost doubled in less than a decade, reaching a height of $1.95 million. Even when you see substantial portfolio declines, you’re still doing pretty well.
The other factor is that the effects of the Great Depression on many portfolios is often misunderstood and overstated. This is what a retirees portfolio would look like throughout the Great Depression. (This includes annual withdrawals for expenses.)
Yes, there is a tremendous amount of volatility that is no doubt anxiety inducing. A loss of $500,000 in a single year (1932) can’t be easy to swallow. And the constant decline from $1.9 million, to $1.8m, to $1.5m, to $1.0m, to $968,000 over five-years wouldn’t have been fun. But remember that investor started out with only a million dollars. So she saw a big drop…but she’s back where she started.
And over the next five years, from 1932 to 1937, the portfolio would climb back up to over 50% to $1.5 million again.
All in all, hardly catastrophic provided the retiree doesn’t panic and sell out.
1877 does well for different reasons: massive deflation and no bad years. In the first year of retirement, stocks lost 3%. But deflation was over 15%. So stock’s actually gained in real terms by 12%. That’s the kind of return most us would love to have.
And the next few years would have a similar pattern. Three years in a row for 25%+ real returns. Couple that with basically no bad years (-5% real return is the worst annual return but that doesn’t strike until the 17th-year of retirement) and you have a recipe for a great retirement.
SSR vs. CER: Why 1921 beats out 1982
Determining which retirement is “best” is not necessarily straightforward. You can rank them by Sustainable Spending Rate (SSR), which is a calculation defined in Optimal Withdrawal Strategy for Retirement Income Portfolios (2012) by Blanchett, Kowara, and Chen.
The SSR is the maximum annual rate you could make if you had perfect knowledge: you knew in advance what the annual returns were going to be. By that measure, both 1921 and 1982 are on top: they both have an SSR of 9.2%.
But of course we don’t actually have perfect knowledge in advance and it would be the rare retiree who starts out with a withdrawal rate that high. But retirees can (and do!) use variable withdrawal strategies. If the markets go up, take out more money. If the markets go down, cut expenses.
But it is hard to compare different variable withdrawal patterns. If I withdraw $50,000; $60,000; $45,000 is that better or worse than $55,000; $55,000; $50,000?
The same authors also introduce a calculation for “Constant Equivalent Withdrawal” that allows you to compare different withdrawal patterns. And 1921 comes out on top with a CEW of 8.8% to 1982’s 8.4%.
So our American Retirement Champion is 1921.
Follow along at home:
Here is a jupyter workbook with all the data and calculations.
Notebook :: Anaconda Cloud
import US based data from 1871 from the simba backtesting spreadsheet found on bogleheads.org # https://www.bogleheads…
And here is a Google Sheet of the results.