Put Your Money Fears in Perspective

ByDavid Champion Hours Categories Retirement Decision
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Suppose I stepped into a time machine that took me back to my drab, corporate cubicle circa 2019. Say I was greeted there by an oracle who foretold that in a year’s time a deadly pandemic would paralyze the globe, and that by 2023 violent conflicts would threaten to engulf Europe and the Middle East in regional, or even world, wars. Given that knowledge, would I have retired?

Fortune teller peering into crystal ball

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 Bill Bengen’s 4% rule, not only would you never have run out of money, your portfolio would be worth roughly $1.3M today.

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, and you’d have ended up with a portfolio worth just $345K today had you applied and stuck to the 4% rule.

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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23 Comments

  1. David, thank you for your timely articles these past couple of months. They have provided helpful information that has further strengthened a decision I’ve had been struggling with.

    I’m not ready to trigger anything yet. I promised myself that I would give it a year before I did anything to make sure I still felt the same way. If I don’t retire outright then, I’m going to at least start taking back my time from my employer (meaning working part time for them instead of full time).

  2. Hi David,

    The fear of the unknown can absolutely paralyze you. I ran into this while deciding when to retire, as I’m sure many people do. I retired at 58 after finally convincing myself of these facts:
    1) There are no guarantees in life.
    2) Life is not fair.
    3) Facts 1 and 2 never change, regardless of your age or how much money you have.
    Once you resign yourself to these, it makes all the “what if” questions easier to understand that you can only control so much, which is very little.

    I’m 68 now and definitely wish I would have retired earlier. I also know of someone who was retired for 3 days and died from an aneurism. This certainly proves the 3 facts I listed above.

    To wrap this up, I know many people that say they wish they would have retired earlier, and I cannot think of anyone who told me they wish they would have worked longer.

    Best wishes!

    1. Well said, KingJoey!

      Yes, the only thing we can be certain of is that we will die. Really important to allow yourself to live a little before that happens.

  3. Agree. Time is most precious commodity we have. Still working in my late 60s because I started late (late 30s) being retirement ready. Yet Fidelity tells me everything would be fine if I retired today. I don’t feel that way. Other factors are always to consider. For ex, we are doing lots of long-put-off home updates that will be much easier to fund if I keep working.

  4. But are you truly retired if you’re running a website that earns from ad income? Running a website, probably does help bridge the gap from full-time employment to retirement? And many of the website owners are doing better than they did when they were working for someone. Genuinely curious about this!

    1. That is a perfectly fair point, Marie. A few thoughts:

      1. The vast majority of the revenue for this site (which is not much) is eaten up by the cost of running it.
      2. Since my own retirement, in March 2019, I haven’t earned a penny of W2 or 1099 income. Thus I believe I am qualified to write about topics like that in today’s post. If I’m lucky, I’ll earn enough from the site by the end of this year to cover the cost of painting my house!
      3. Chris and I both regard this site as a hobby, not a business. We write because we hope to share experiences and ideas that might help other folks navigating the retirement decision.

      Thanks for your comments, Marie, and for reading the blog.

      Best,

      Dave

  5. I survived the 89 crash and did not sell.
    I survived the dot com bubble and did not sell.
    I survived the 9/11 attacks and did not sell.
    I survived the financial crises of 07-08 and did not sell.
    I survived the COVID 19 crash of Feb-March 2020 and did not sell.
    And I survived the bear market of 2022 and did not sell.
    But I DID continue to purchase through all those “the sky is falling” events while employed and earning income. Retired in Jan 2008 and no longer contributed to portfolio, but started rebalancing anytime my AA drifted by 5 points or more, in either direction. Started retirement with $1.51M, have spent $1.9M in our 16 years of retirement and our portfolio at the end of Aug 2024 was north of $1.94.

    1. Was wondering when you would chime in, JC!

      Thanks for the summary case study, which lends weight to the message I am trying to get across in the post. I would only add that it is a lot easier psychologically to buy low—through dollar–cost averaging and/or portfolio rebalancing—while you have the added insurance of a paycheck.

    2. JC: Thanks for your transparency in the past about your yearly net worth and your big drop at the start of retirement. Your story is really great that you have continued to have a successful retirement. We always feel like we just want to have a $1 more net worth at end of year minimum. Were there any thoughts during those several years of your still being below your initial retirement start net worth that ‘we’re not caught up yet’. Curious if that ever creeped in and informed any of your yearly budgeting or if anything gave you pause? I just think most people would go off the rails.

  6. I retired at the beginning of 2000 – just before the market had a huge selloff. Many folks that I knew had also retired. Unfortunately many of them were unprepared for a selloff – they had retired on the hope that the outsized gains of the 1990s would continue.

    I had taken much of my market gains and removed them from risk. As you, I survived and have more income and more savings than when I retired. going strong after nearly a quarter century.

    Remember PPPPP – Proper Planning Prevents Poor Performance

    1. Thanks for the share, Cynical.

      Seems in your case timing the market worked. In most cases it does not.

      Best,

      Dave

  7. Thank you for the helpful post. My spouse and I are in the midst of this discussion. We have enough, and he understands we have enough. He’s still working because he enjoys his work. Almost every day, I tell him if you want to quit, go ahead. But I don’t want to make the decision for him.

    1. Hi Sharon,

      This is not an uncommon problem. I think if you can find a middle way, one that is at least satisfactory for both of you, you will be in good shape. Of course, we want the whole loaf. Sometimes we need to settle for half. Maybe think outside of the box, and a solution will present itself.

      Best of luck to you,

      Dave

  8. While your net worth is 6% higher, it is worth noting that it has 10-15% less purchasing power due to inflation.

    I’m not trying to be negative but it’s important to highlight that you are like for like in a more precarious position than your retired year in 2019. And this is DESPITE the strong financial market swings in the past 5 years.

    1. Great point, Jay!

      This fact is not lost on me. I even wrote about it in July in a post titled, Am I as Rich as I think? In that post, I went on to say that I’d adjusted my spending to blunt the effects of inflation.

      Best,

      Dave

  9. Retired in 2018 and completely agree with David Champion. I have about 61/32/7 stocks/bonds/MM mix to rely more on dividends & interest income + SS to fund retirement. Patience to endure market swings is the key to long view success.

  10. I’m not trying to give you a hard time, but I did not understand your 4% examples. Are you saying in the examples that one takes 4% of each year’s starting balance to spend for that year? Or, are you saying that one does that the first year of retirement and then continues to take that dollar figure but adjusted each year for inflation? That latter case is the widely discussed “45 rule of thumb”. The former case, where 4% of each year’s starting balance is used for that year is not a withdrawal strategy that I am familiar with. No matter what, that portfolio can never run out of money because 4% of any balance still leaves 96% of the balance in the account. That means you will spend smaller amounts of money each year, but literally never run out no matter how poorly the market does, but you might not have much money to spend because 4% of a low number is a VERY low number. Is that the “strategy” you meant? Or, did you mean the 4% rule of thumb? Seemed to me that you were blending them together in your description, but they are very different.

    1. August, indeed you are right, and I apologize for the confusion.

      To generate the numbers I cite in the article, I used a tool that calculates withdrawals totaling 4% of each year’s beginning balance, which is adjusted for the previous year’s market returns and inflation.

      The 4% rule, as conceived by Bill Bengan, would have you start with 4% of your portfolio value, and adjust that number annually for inflation.

      I re-ran the numbers using a 4%-rule calculator, and all else equal, the ending balance came to roughly $1.3M on the hypothetical $354K portfolio, not the $1.9M I cited in the article.

      Thanks again for pointing out this discrepancy, August.

      Best,

      Dave

      P.S. I edited the post for clarification. Feel free to fact-check if you like!

Comments are closed.