If 1921 was the best year to retire for an American, what was the worst?
Last time I looked at what were some historically great years to retire in and found that shortly before the Great Depression was, paradoxically, the best year to retire.
We can also flip the question on its head and look at what were the worst years to retire. To do that we need to come up with some metric for deciding on “worst”. Most retirement research has a binary definition of success: did a portfolio last all 30-years of retirement?
Obviously, there are a lot of problems with such a simplistic metric. People are unlikely to spend their portfolio down to $0. Instead they’ll start making cuts and try to stretch things out. So instead we can look at how deep those cuts need to be.
We can also try to take longevity into account. If you’re portfolio generates $15,000 less income than expected, most people would prefer that to happen at age 95 than at age 65. You’re going to be healthier to actually enjoy the extra income. You’re more likely to simply be alive.
After all, there’s a 15% chance of dying in the first 10 years of your retirement.
Calculating a Retirement Suckiness Score
Here’s what I did…
- Use a variable withdrawal strategy. This guarantees the portfolio lasts until the end but it makes no guarantees about how much money you’ll get any given year.
- Pick a spending floor. Anything above this is gravy. Extra vacations to Europe. A new car. Better Christmas presents for the kids. Below this floor and you need to tighten your belt and the pain starts. You don’t fly out to see the grandkids for Christmas. You keep your 12-year old car a little while longer. You start thinking about downsizing the family home and living in a condo.
- Raw Score = Annual withdrawal - spending floor. If things are just a little under the floor, there’s only a little bit of pain (no more takeaway dinners). If things are a lot under the floor, it starts to get more painful.
- Weighted Score. Multiply the Raw Score by your chance of being dead by that point. This means that early failures are penalised more than later failures.
Since this is a suckiness score, lower scores are worse. The best score you can get is 0, which means every year your spending needs were met and you die happy.
1966 was a bad year.
If you’re a retirement research aficionado, you probably already knew that 1966 was a terrible year to retire. And it comes out on top of the Retirement Suckiness Score. (Which I suppose helps show that the RSS isn’t complete bullshit?)
1966 has an RSS of -7.03 which was substantially worse than 1965’s second place showing of -6.55. 1966 stands out for the length and severity of the impact on withdrawals.
In order for a variable withdrawal strategy to survive a 1966 retirement, a retiree will see their withdrawal rate drop below 3% for a 6-year stretch from 1978 and 1984.
What would that have meant concretely for a retiree? It might have looked something like this:
You have $1 million in your portfolio. You’ve heard that 4% is the Safe Withdrawal Rate and you figure you would have a good retirement on $40,000 a year. But you also figure you could cut the fat a bit and get by on $30,000 if you had to. You wouldn’t go out to dinner as much. You’d stop going to the opera and theater. But you figure you could tighten your belt for a year or two if you needed to.
Instead you were faced with a six-year stretch where you weren’t taking out $40,000. And you weren’t taking out $30,000. Your actual withdrawals over that period were
- $29,000
- $27,000
- $26,000
- $28,000
- $25,000
- $29,000
Going from an expected $40,000 to an actual $25,000 is rough.
That six-year stretch is the worst of it but not the only bad part. The retiree thought they were going have a comfortable retirement of $40,000 a year. But a full 15-years of retirement (50% of their entire retirement) saw their withdrawals drop below that level.
If you are flexible in your retirement needs, you can weather a lot of storms. But this also shows that the storms can be pretty damn long.
1902 comes in #3
A 1902-retirement comes in 3rd place (after 1966 and 1965). What made things so bad for the 1902-retiree? They get hit with a triple-whammy:
- The post-WW1 recession of 1918–1919
- The 1920 recession
- The Great Depression
But their retirement is over before they reap any of the gains after the depths of the Great Depression.
One takeaway seems to be: prefer massive depressions to strike early, rather than late, in your retirement.
Flexible Spending is key…but be prepared for a lot of variation
A variable withdrawal strategy is great for making sure your portfolio lasts when markets take a turn for the worse. But it also means that a retiree needs to be mentally prepared to cut spending. Of the 145 retirements in the simulation, 58 of them (i.e. 40%) required a retiree to cut their expenses below the 3.5% floor at least once.
But let’s temper that with some perspective. Even in a scenario where you have to cut expenses sometimes, the majority of your retirement is still very comfortable. Take an 1886-retiree. Sure, they had to cut their expenses to 3.4%. But that was only in the very last year of their retirement. And that was paired with 14-years where they could spend over 6%. To continue the concrete example from above, instead of getting $40,000 a year you actually get over $60,000 a year for 14 years. An extra $20,000 year to spend is a nice problem to have.
Follow along at home:
Here is a jupyter workbook with all the data and calculations.
And here is a Google Sheet of the results.
https://docs.google.com/spreadsheets/d/1xbiGvczyXDPtOJfXKBDBheY0tA-vjB9lEDdS2PGb3Jc/edit?usp=sharing
