Retirement Threat: Poor Stock Returns

By Paul Ruedi

People who are transitioning into retirement or are already retired face many unique threats, any one of which could be enough to completely destroy their retirement if no preventative measures are taken. One of those risks is that the stock market just quietly provides sub-par returns over a long period of time. Though when I say “sub-par” returns everyone’s minds likely run to a return of 0% or lower, if a retiree receives compound returns even a couple percent below the historical average it can spell trouble.

Though the variability of stock returns decreases with time, there is still a chance that instead of getting a “normal” or “average” return, a retiree could simply get a “bad draw” with low returns over 20 or 30 years. In recent memory, during the twenty-year period that ran from 1999 – 2018 the S&P 500 produced a 20-year return below 6%, which is well below its historical average of about 10%. Of course, this is only one group of stocks, but the message is clear: bad performance can span decades. Even long-term stock returns of just 8% instead of 10% compounded over decades can have enough of an impact to derail a retirement.

Since it is impossible to know what stock returns will be in advance, the best plan of action for retired investors is to spend from the portfolio so their goals will be funded even if they get bad investment returns. This means starting off retirement with a somewhat conservative portfolio withdrawal rate that assumes the possibility of a bad draw on the front end of retirement.

However, this needs to be done within reason, and balanced versus the fact that life is happening now and you only get one shot at retirement. You don’t want to spend so conservatively that you end up the richest person in the graveyard. A spending plan that starts off conservatively by anticipating these bad draws will likely lead to increased spending over time (even with average returns) if it becomes clear you are not getting that bad draw. It will be crucial to make those upward spending adjustments to make sure you get the most out of life.

Deciding how much to withdraw from your portfolio during retirement is complicated and should be done with the help of a professional. If you aren’t sure how much to spend at the start of retirement to make sure you are covered if poor stock returns show up, or how to adjust that spending over time, you may want to talk to a retirement planner.

Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.