Will 2000-Era Retirees Experience the Worst Retirement Outcomes in U.S. History? A Progress Report after 16 Years

In 2010, retirement researcher Wade Pfau published a paper with the above title. It is a good paper but I thought it would be interesting to revisit how things have gone in the 6-years since then. Has it held up as a horrible retirement time?

Pfau starts out by showing us that you can look at some early indicators to predict eventual portfolio success or failure.

The wealth remaining and inflation experienced after 5 years already explain about 50 percent of the ultimate retirement results, and after 10 years these two explanatory variables account for about 73 percent of the final wealth and about 80 percent of the MWRs. After about 18 years, the explanatory power for MWRs exceeds 90 percent

Pfau eventually concludes that a 2000-era retiree is in the worst shape (after 10 years) of any retiree in American history, with only 54% of their wealth remaining. The 1929-era and 1999-era retiree come in second place with 57.8% of their wealth remaining.

Pfau then has a nice section looking at 1929-era, 1966-era (another historically bad year to retire), and 2000-era retirees to see why exactly things break down. Of course, like Tolstoy might have said, every unhappy portfolio is unhappy in its own way, but it is still interesting to look at the ingredients of failure.

What’s in store for the 2000 retiree?

Pfau closes with a section where he tries to divine how the next 10 or 20 years might go for this 2000-era retiree. Is there any hope? How much do things have to turn around? Sure, he has lots of disclaimers and caveats. Predicting is hard, especially about the future.

Still, I think it is interesting to take a look back at this older paper and see what kinds of expectations and predictions people were talking about back then. It is a nice little case study on mean reversion, predictions, and little bit of doomsaying. (I’ve always thought Pfau is a bit too pessimistic.)

First he establishes that historical average real returns are 4.86% then says

Taken together, retirees should not expect asset returns to even match their historical averages. Using analysis based on these market fundamentals as of October 2010, West [2010] actually forecasts an average real return of about 2 percent for a 60/40 portfolio over the next 10 to 20 years.

So 4.86% is too much and we should be expecting 2% real returns over the next 10 years.

It hasn’t been 10-years yet—only six-years—but what have real returns been like since 2010?

According to MoneyChimp’s calculator (which includes both inflation-adjustments and dividends) the S&P 500 has had an annualised return of 11.23% since January 1, 2010.

And according to Portfolio Visualizer Vanguard’s Intermediate-Term Bond Fund has had a CAGR of 5.58% over that same time period. That’s not a real return. Using the BLS Inflation Calculator we know that inflation was around 1.9% annually over that period. So 3.68% real.

That gives us a blended real return of 8.21%, which is well above the 2% prediction. It is actually so good that the 2000-era retiree has pulled out of the danger-zone. (At least for now.)

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