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Retirement planning can be a difficult trade-off between saving too much and not saving enough. If you run into a bear market soon after retiring, you might run out of money. Alternately, retiring at the start of a strong bull market might result in unexpected gains.

The risk of saving too little is highlighted by the experience of unfortunate investors who retired at the top of the market just before the internet bubble burst in 2000. I was inspired to occasionally check in on the poor souls by Norbert Schlenker, the president of Libra Investment Management, who’s been tracking their progress at the Financial Wisdom Forum.

Before diving into the results, it’s useful to try to put yourself in the shoes of someone who was on the verge of retirement in 2000. The market was booming at the time with the S&P/TSX Composite up by an average of 13.9 per cent annually from the start of 1995 to the start of 2000. The S&P 500 fared even better with 22-per-cent average annual gains over the same period thanks to the tech mania.

While many investors thought the good times would continue well into the 2000s, a skeptical minority were guided by market history and the booms and busts of the past. They paid attention to financial planner William Bengen’s 1994 paper called Determining Withdrawal Rates Using Historical Data. He found that a balanced portfolio of U.S. stocks and bonds of $1,000,000 could sustain a 4-per-cent initial annual withdrawal rate, subsequently adjusted for inflation, for at least 30 years before running out of money.

The bursting of the internet bubble provided a real-time test of Mr. Bergen’s “4 per cent rule,” which brings me to the hypothetical Canadian investor who started their retirement at the end of August, 2000. They began with a $1,000,000 portfolio. Half was invested for growth in the S&P/TSX Composite Index while the other half was invested for income in the S&P Canada Aggregate Bond Index.

The investor took $3,333.33 out of the portfolio to live on at the end of each month (a 4-per-cent initial annual withdrawal rate) with the payments being stepped up each month to adjust for inflation. (The figures herein are based on monthly data with reinvested distributions, but they do not include fund fees, taxes or other trading costs. The portfolios were rebalanced monthly.)

The accompanying graph shows the inflation-adjusted value of the portfolio over time, along with similar portfolios with initial withdrawal rates ranging from a more-conservative 3 per cent to the too-optimistic 6 per cent.

The portfolio using the 4-per-cent initial withdrawal rate started badly. It lost roughly 30 per cent, in real terms, by the spring of 2003. It bounced back in the subsequent recovery to just over $930,000 by 2007. It fell again in the crash of 2008 to hit a low near $690,000 in early 2009. The portfolio then struggled higher but didn’t return to its former highs. The COVID crash, inflation and bond downturn saw it fall to near $540,000 by May 31, 2023.

The odds favour the portfolio making it through to the promised 30-year period, which ends at the close of August, 2030. But it might be cut short by surging inflation or a bad bear market.

Speaking of being cut short, investors who opted for a 6-per-cent initial withdrawal rate have already gone bust. Those using a 5-per-cent rate are also on shaky ground because they’re likely to run out of money in about five years without the benefit of a strong market surge.

Investors seeking higher withdrawal rates might look to international diversification for succour. Alas, the nominal returns of the S&P 500 and EAFE indexes were quite poor (in Canadian-dollar terms) over the 12 years after Aug. 31, 2000. But that’s a depressing story for another day.

Wise investors should include a margin of safety in their retirement plans in case they start at the top of a bubble. Doing so might mean choosing a more conservative withdrawal rate. Alternately one might leave room for belt-tightening, or being willing to return to work, in hard times. In other words, plan as if you might be poorer than you think.

Norman Rothery, PhD, CFA, is the founder of

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