Put Your Money Fears in Perspective

I am pretty sure the answer is no. I would not have risked a retirement whose success depended on financial markets so vulnerable to the caprice of world events. How could my portfolio survive a once-in-a-century pandemic and two existential wars, much less provide returns sufficient to fund 40 years of retirement?

Obviously, I could not have known then what I know now. In fact I did cast my lot to the whims of the financial markets. Yet despite five years of regular withdrawals, my portfolio is worth more today than it was the day I retired.

Does this mean the bottom can’t yet fall out of the markets, say in the next five years? The wars in Europe and the Middle East could spiral out of control, or a new one in the Far East might draw the United States into a costly, even existential, conflict. But as Mark Twain once said, “Worrying is like paying a debt you don’t owe; I have spent most of my life worrying about things that never happened.”

Hero to Zero

I am asked all the time how I handled the transition from being a wage-earner to a zero-income, self-funding retiree. The answer is that the first few years were terrifying. Imagine my horror in early 2020 when the S&P 500 lost over a third of its value in just two months!

But the fear of outliving my savings has abated. With five years of data in the rearview mirror, the upshot is that with no earned income, and an annual withdrawal rate averaging 4.1%, my net worth is 6.3% higher today than it was when I retired.

Related: Am I as Rich as I Think?

Again—and this is the crucial point here—I can report this outcome despite one of the scariest rides in recent history. The fact that I am five years older puts me further at ease, because I now have less time to spend down my savings.

Magical Thinking

If thought experiments, personal anecdotes and/or pithy quotations aren’t enough to convince you the way forward is safe, you can try to make a reasonable forecast. One approach is to backtest a portfolio against the historical record.

The 60-40 Portfolio

Suppose you retired in 1987 with a 60-40 U.S. stock-bond portfolio worth $354,000 (the equivalent of $1,000,000 in today’s dollars). If you had stuck religiously to a 4% annual withdrawal rate, not only would you never have run out of money, your portfolio would be worth nearly $1.9M today—a near doubling in value!

Yet the period from 1987 to today featured a slew of market meltdowns:

In each case the markets bounced back, with an average recovery period of just 21 months for the 60-40 portfolio.

Related: Will the 4% Rule Lead to Financial Ruin?

The Risk of Not Retiring

If you have amassed savings sufficient to fund your spending needs for 30 years or more, and you have the willingness, ability and discipline to dial down your spending from time to time, you should be able to withstand all but asteroid-level events given this track record.

And if an asteroid does strike? Then working longer might be the biggest mistake you ever made.

Timing Your Retirement is Like Timing the Market

The naysayers among you might scream, “You haven’t considered sequence-of-returns risk!”

Suppose that instead of 1987, a year followed by a long period of relative prosperity, you had retired in 2000 at the dawn of the Dotcom bust. The longest-lived of the aforementioned meltdowns, this one would have held your portfolio underwater for 41 months.

Yes, the story would be different. But you’d still have a portfolio worth nearly $1M had you stuck to a 4% withdrawal rate. Of course 4% of $1M is a lot less than 4% of $1.9M, and your standard of living would no doubt have taken a hit.

But how could you have known? Trying to time your retirement is like trying to time the market. If you happen to get it right, it’ll be blind luck. More likely, that extra three years you worked returned something closer to the 8.8% your 60-40 portfolio has averaged since 1987.

Social Security to the Rescue

Have I mentioned the least risky, inflation-adjusted annuity you’ve already paid for? Yes, I’m talking about Social Security. The whole point of Social Security is to supplement your savings in retirement; to serve as a safety net.

To the unlucky Y2K retiree, Social Security would have come through in spades the instant they became eligible to file for benefits.

Try to Avoid Regrets

A proverb I invoke frequently on long-distance hikes—to the enduring disgust of my hiking companions—is that while it is good to learn from one’s mistakes, it is better to learn from the mistakes of others. (That is why I always insist they go first when negotiating a narrow canyon or a cliff’s edge.)

The same can be said of regrets. According to at least one informal survey, 70- and 80-year-old retirees counted the following among their top five: 1) not retiring earlier and 2) not spending more in early retirement. While oracles of the kind introduced at the beginning of this post may not exist, these older retirees are a pretty close second. What can we learn from them? For one thing, their money fears were overcooked.

For many who still work, the only thing standing between them and their dreams is the perceived vulnerability of their nest eggs. As is the case with so many of our fears, we exaggerate it to our detriment.

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[I’m David Champion. I retired from a career in software development in March 2019, just shy of my 53rd birthday. To position myself for 40+ years of worry-free retirement, I consumed all manner of early-retirement resources. Notable among these was CanIRetireYet, whose newsletters I have received in my inbox every Monday morning for the last ten years. CanIRetireYet is one of exactly two personal finance newsletters I subscribe to. Why? Because of the practical, no-nonsense advice I find here. I attribute my financial success in no small part to what I have learned from Darrow and Chris. In sharing some of my own observations on the early-retirement journey, I aim to maintain the high standard of value readers of CanIRetireYet have come to expect.]

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