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Norman Rothery, PhD, CFA, is the founder of

Investing in retirement can be nerve-racking. Take the wrong step and you might walk into the poor house. But a sensible approach can help you make it through the bad times.

Today, I’m going to model the fate of an unfortunate investor who retired at the top of the stock market in 2000. It’s a retrospective inspired by Norbert Schlenker, the president of Libra Investment Management, who has been tracking the hypothetical at the Financial Wisdom Forum.

Try to put yourself in the shoes of investors back in 2000. The stock market had climbed at a heady pace in the late 1990s. It was widely expected to continue to shoot skyward and the idea the market wouldn’t continue to grow by at least 10 per cent annually would been preposterous to many back then.

It’s easy to see how wrong they were in hindsight. The S&P/TSX Composite Index generated average annual returns of 5.75 per cent from the start of 2000 to the end of 2018 and that includes reinvested dividends, but does not adjust for inflation.

Those retirees who didn’t get caught up in the speculative mania of the time might have followed the 4-per-cent rule popularized by financial planner William Bengen in a 1994 paper called Determining Withdrawal Rates Using Historical Data. He figured that, for a balanced portfolio of U.S. stocks and bonds, a 4-per-cent initial annual withdrawal rate, subsequently adjusted for inflation, could be maintained safely for at least 30 years without running out of money.

Mr. Bengen’s work has come under some criticism in recent times. For instance, it doesn’t work flawlessly when applied internationally. But it’s a good starting point.

Today, I’m going to model the experience of a retiree who invested in a balanced index portfolio when they left work in August, 2000, at the top of the market. More specifically, the retiree started with a $1,000,000 portfolio. Half was invested in the S&P/TSX Composite Index and the other half was invested in the relative safety of the S&P Canada Aggregate Bond Index. They 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) and the payments were stepped up each month to adjust for inflation. (The figures herein are based on monthly data and do not include fund fees, taxes or other trading frictions. The portfolios were rebalanced monthly.)

I also tracked three similar portfolios with different annual withdrawal rates. The accompanying chart shows the inflation-adjusted growth of all four.

The portfolio using the 4-per-cent rule lost almost 30 per cent of its value, in real terms, by the fall of 2002. It climbed in the subsequent bull market to just above the $930,000 mark in 2007. It crashed in 2008 and fell below $690,000 in early 2009. Since then, the market climbed but not enough to offset the monthly withdrawals. The portfolio ended last year near $668,000 in inflation-adjusted terms.

That’s not a great experience, but odds are the portfolio will survive for the promised 30 years. After all, it’s well past the halfway mark and it still has a good amount of capital left over. Despite retiring at an inopportune time, the 4-per-cent rule appears to be working for the retiree.

More aggressive withdrawal rates didn’t fare as well. An investor who opted for a 6-per-cent rate is facing the prospect of bankruptcy in a few years. I’ve not shown them, but a 7-per-cent rate caused the balanced portfolio to go bust in 2017 and a 10-per-cent rate failed back in 2011.

If you’re nervous about how long your money will last in retirement, you might adopt a withdrawal rate near 3 per cent to include a margin of safety while sticking with low-fee funds. Similarly, being able to tighten one’s belt in hard times or having a part-time job can really help portfolio longevity.

While only a few people retire near market peaks, those who do should be able to make it through with a suitably conservative retirement plan.

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