You Retire… Then Lose Half Your Money. Now What?

This year, tens of thousands of Kiwis will reach retirement age — but how much does timing really matter? 

In this episode, I break down three real retirement scenarios using the same $2M portfolio across very different market conditions. The results might surprise you — and challenge how you think about risk, timing, and what actually makes a plan successful. 

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The information shared on The Dollars & Sense Podcast is general in nature and does not consider your individual circumstances. Dollars & Sense exists purely for educational purposes and should not be relied upon to make an investment or financial decision. Tim Ellis (FSP778196) and Brodie Haggerty (FSP778174) are both Financial Advisers providing advice on behalf of FoxPlan Ltd. FoxPlan Ltd (FSP39630) is a licensed Financial Advice Provider. Important information can be found at www.foxplan.nz/disclosure 

Transcript

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This year, roughly 25,000 to 35,000 Kiwis will hit the age 65. A large chunk of those people won't actually be able to retire. Many people keep working past the age of 65 or perhaps start to ease things off. Nearly 50% of Kiwis aged 65 to 69 years old are still in some form of employment. But for those that are fortunate enough to be in a position to be able to retire today, are they also fortunate enough in their timing? The question I posed in the intro there was that people that are fortunate enough to be in a position to retire today, will they be fortunate enough in their timing of this? The reality is we can couldn't possibly know the answer to that. We'll only know that in hindsight. But what we can know is what's happened over the last 30 years. So this week's episode, I'm going to be taking a look back at the last 30 years, what a retirement would look like considering market returns over the last 30 years and some of the most fortunate timings. And we'll also take a look at what would have happened if the timing was the most unfortunate in the last 30 years. Just before we get underway with this week's episode, as per usual, I'd like to cover off the fact that this is meant to be educational purpose only. It is not designed to be specific financial advice. And I highly recommend you seek the relevant professional before making any major decisions. With that being said, this week's episode, what I thought would be a prudent exercise to do is let's take a look at a retirement scenario over three different time periods in the last 30 years. So that what will remain consistent in each of these scenarios is making a very, very broad assumption that uh somebody has retired with a$2 million nest egg invested in the SP 500. They'll be withdrawing$100,000 every single year. We're not going to go to the effort of inflation adjusting the withdrawals just yet. I want to keep this super high level and super basic and simple. So every year,$100,000 will be taken out of the portfolio before the annual return, negative or positive, is uh taken into effect. Okay, so scenario one, we're just gonna take things all the way back to uh if somebody was to retire in the year 1995, starting January 1st, that way we're gonna have 30 years of uh actual data of what the SP 500 did for every single one of those years. So we'll be calculating the the uh entire time period in scenario one. Scenario two, we'll keep all the assumptions the same with one little small difference. We'll start the retirement the year before the tech wreck. So the year 2000 is when the retirement will start. And then in the third scenario, we'll go for the worst possible timing on this 30 years captured here. We'll we'll retire the year before the global financial crisis. So let's start with scenario one. This person retired in 1995 again with a$2 million nest egg fully invested in the SP$500, drawing down$100,000 each year from the portfolio. How this one starts is an absolute dream run. Years 1995 through to 1999, that$2 million portfolio would have turned into about$5.9 million, despite withdrawing$500,000 from the fund over the same period of time. I'll repeat that. Half a million dollars was taken out of the fund to fund retirement for those five years. Yet the balance at the end of 1999 would have turned$2 million into$5.9 million. Not a bad start to retirement. A retiree could be forgiven for thinking this is easy. Markets just they just go up. What happened after 1999? We had the tech wreak. Reality has hit very hard. The year 2000 to 2002, we've actually had three consecutive negative years. 2000 being minus 9%, 2001, minus 11.9%. And then just to make things worse, 2002 minus 22.1%. So that portfolio that started going into this period at 5.9 million at the end of 2002 is going to be worth 3.4 million. Remember, withdrawing$100,000 each year as well. So just after that big dip of going from$5.9 to$3.4, they're still needing to take$100,000 out of that portfolio. Here comes phase three of this scenario, though. It's the recovery and perhaps complacency. 2003 to 2007, the markets have rebounded quite strongly. The portfolio has gone back to about 5.8 million. Again, still taking that$100,000 every year. Most investors by that point would start to feel like they can breathe again, getting through a pretty scary moment. But then for the real gut punch, uh, of course, we know what happened in 2008. We had a negative 37% return. That portfolio has dropped from 5.8 million to 3.6 million in one year. And remember,$100,000 needed to be taken out at that point. This would be the moment that most people break. That is a hard pill to swallow. Things were finally back on track. The fund was worth$5.8 million and has gone all the way down to$3.6 million all in one year. Whilst the media a warning of the global financial crisis, a massive upset. There is news article after news article after news article about the global financial crisis. The housing bubble has popped. US is in turmoil, yet you still need to be taking$100,000 out of the portfolio after seeing it go from 5.8 to 3.6. A hard pill to swallow. Bring on phase five, the long grind up from the year 2009 to year 2021 was an extremely strong bull market. So the portfolio actually climbs to a steady$20 million value. That's right. The fund that started at$2 million and has been providing$100,000 every year in retirement between 2009 to 2021 in this scenario would steadily climb to a value of$20 million. Only people that managed to stay invested would have got this reward. Just as things start to sound so peachy, of course, there was the uh rather recent volatility, all being at quite short, but uh in the year 2022, you know, we had the COVID uh crash, you might have seen a negative 18% in US stocks that year, but then very, very strong recovery years. The portfolio at the end of 2025 would have been worth about$29.8 million. The$2 million start has turned into nearly$30 million, despite providing$100,000 income every year in retirement. What you can take from this scenario is it actually started really easily. You'd be able to say in hindsight now that that was a very, very fortunate time to start retirement. That the gains probably felt too easy. The first shock hits, but what makes this one easy to uh easy to overcome or deal with psychologically is you had the original$2 million investment. The fund never even went back to what you started with despite taking money out. The first real market volatility that hit was five years down the road, after the portfolio had already made extremely significant gains. So psychologically, a lot easier to slip into retirement and be comfortable with uh the retirement funds providing for lifestyle. Confidence was only questioned after the massive gains. But what if we were to take the exact same assumptions and not have such fortunate timing? As I said earlier in the episode, scenario two will keep all the same assumptions, but let's start the retirement in the year 2000. So here's how that looks right out of the gate, the year 2000 is a negative 9.1%. 2001, nearly negative 12%. And again, to remind you of that horrible 2002, negative 22.1%. That's how this retirement scenario starts. The$2 million starting portfolio after just three years is now worth$1.1 million. So think about that. You've been working for 30, potentially 40 years to build a nest egg. You've got this to a level of assets that you should feel is you should be comfortable with in retirement to provide an income beyond your life expectancy. But in just the first three years of retirement, your portfolio is nearly halved. Then brings in phase two, the market rebounds. The years 2003 to 2007. By the end of 2007, the portfolio manages to climb back to$1.8 million value. Again, remembering that you're taking$100,000 out of the portfolio every year. But you still haven't quite recovered to your starting point after seven years of being invested. You're still not even back to where you started with the$2 million. And again, this is year 2007. So you know what's about to come. Here comes the 2008 hit. A negative 37% year has turned that$1.8 million portfolio that's been slowly climbing back to where it started and has taken it all the way back down to$1.05 million. I'll repeat that again to try and paint the picture. For the first seven years, the portfolio had been in decline and nearly got back to where it was at the start. And then in just one year, it's gone back down to 50% of the starting balance. After eight years of investing and withdrawals, you're basically back to where you were in the year uh 2002, only two years into your retirement. Alas, the relief, phase four, the long rebuild. Again, using that time period, 2009 to 2019, we've had a very strong bull market. The portfolio finally starts compounding properly. It crosses the$2 million mark at about year 2013 or 2014, and then accelerates upwards from there. Of course, we still had COVID to consider. So years 2020 to 2025, with the COVID drop and the year 2022 that had a negative 18% return, then the recovery. This portfolio at the end of 2025 ends with a value of$7.6 million. Vastly different to the 30 million that we uh witnessed in scenario one. How this scenario differs so much, not just by numbers, but think about the psychological roller coaster this retiree might have gone on. Confidence is seriously rocked right from day one, straight out of the gate, first three years in retirement, halved the portfolio. The discipline to keep taking money from that portfolio after$2 million turning into$1 million in the first three years, that's going to require some extreme discipline, some good guidance and uh a gentle nudge to stay the path. Yeah, imagine working for 30 plus years to build that$2 million nest egg and then having it just halved in the first three years, whilst you're still able to work and fit. I could forgive retirees for starting to consider, hmm, maybe I need to get back to work and replace uh what's been done here. I could understand that. The portfolio stays down for a such a long period of time. You know, the media would have been putting out doom and gloom throughout the whole global financial crisis. And you know, it's not until about 13 or 14 years after you retired that the portfolio actually start to reach its start, uh the starting value of$2 million. Again, just to remind you, throughout that first 13 to 14 years while that's occurring and you still were capable of working and and and earning, I I I would forgive people for considering going back into the workforce. I could understand where they're coming from. Now let's take a look at the third scenario. The worst timing possible over the last 30 years to start retirement. The first year of retirement is the year before the start of the global financial crisis. So in this scenario, uh retiring in the year 2007, you get a small, small false sense of security. You had a tiny positive return of about 5.5% that year. So the portfolio sits around 2 million because it started with 2 million, it's had a 5% return, but you took 100,000 out, which is 5%, you're back to where you started. But then the year 2008, that's gonna hit hard. A negative 37% return in your first year in retirement. In just one year, your portfolio's gone from a value of about 1.9 million to 1.2 million. Think about that. You've barely retired and your plan already looks broken. How many more of those years would you be able to sustain until the portfolio is at zero? These are the things people would be thinking about. Uh imagine having the confidence rocked and again reminding you that you might feel that you're able to go back out into the workforce. A tough pill to swallow in this scenario. But let's see what happens after that. You stay invested from 2009 to 2012. Those were the strong rebuilding years. Withdrawals are dragging the portfolio down, uh, but the portfolio slowly builds to about 1.8 million by the year 2012. So here's the problem with this scenario. You're five years in and you're still not comfortably ahead of where you started. Bring on phase four, 2013 to 2019, a strong bull market. The portfolio in this scenario actually grows pretty meaningfully from 1.8 million to about 4.5 million. This is where patience is really starting to pay off. If if somebody was able to in uh scenario three stay the course, that patience was very heavily rewarded. Of course, we still have uh COVID to consider here in the year 2022 with the negative 18%, the portfolio dips again but holds. Phase six is the strong finish, the years 2023 to 2025, big positive years. This portfolio accelerates and ends the uh the scenario 2025 at 10.9 million. So even though scenario three was a worst or a more shocking start, it actually turned out to beat scenario two, but of course was nowhere near the uh the outcome of scenario one, uh, which was being invested for the whole 30 years. So I I know plenty of people in the finance world and financial services listen to this podcast and they'll be screaming, yeah, but what about, you know, uh inflation adjusted ret uh withdrawals? Of course, a major part, and I don't mean to uh you know uh take that that consideration away from this, and you're quite right. Inflation adjusted uh withdrawals, hugely important to a retirement plan. Uh what$100,000 could buy today versus what it'll buy in 30 years, markedly different. So if we look at scenario three, where I said the portfolio ends at around ten million dollars in value, if you had inflation adjusted withdrawals, meaning the$100,000 that you took out in year one is increased by 2.5% every year to account for inflation, then the true end balance at at the end of uh the year 2025 in that scenario is$6.2 million, a$4 million difference. So of course, inflation adjusted withdrawals has a huge, huge effect. It's more money being taken out of the market. The difference isn't just the amount of money you're taking out, it's how much you're taking out of the market. So here's what I want listeners to take away from this week's episode. The the message behind these are three scenarios. The reality is the portfolio had nothing to do with the different outcomes here. I simply said we're going to be invested in the SP 500 uh alone and make the assumption that all the market returns were captured for the retiree. There are a plethora of funds that track the SP 500 that could have been used in this scenario. Uh the construction of the portfolio by no means is imperative to the discipline that it would have taken, uh, depending on what time uh the retirees started their retirement and their withdrawals. That is truly what would have made the difference between the uh the end balance and whether somebody went back to work or not. Having a solid plan, far more important than the intricacies of the portfolio that's going to be used to get the outcome. The returns were just market averages. The risk of the plan was fully determined by the behavior of the retiree. The strength of the plan lies in the discipline to stick to it. Let's take this higher level look at things here. And the the reality is, each scenario, whether fortunate or the unfortunate or the very unfortunate start date, each scenario achieved the goal of the plan, which is to have an income of$100,000 every year as long as the plan was stuck to. The timing didn't matter. If all that mattered was was the retiree able to withdraw the money they need for their lifestyle. So good luck with timing or the worst luck. The outcome was the same. Every withdrawal made and each portfolio grew beyond the starting balance. Now, you might hear me say that and say, well, why on earth would we need a financial advisor then if it's as simple as that? Surely I can be able to control my own behavior. If the portfolio doesn't matter, then any S ⁇ P tracking index fund will get the outcome, right? Well, a smart portfolio can actually assist. Yes, of course, the value of the financial advisor is the behavioral coaching, but I just don't want to be too dismissive of a really smartly constructed portfolio. What I'm not getting at is trying to have a portfolio that's going to outperform the market average. Sure, it might. It might get perfectly average. That's not what I'm getting at here. Uh what I'm getting at with a smart portfolio is in no scenario was outperforming the market average ever required. A smart portfolio can just help cushion blows and ensure market averages can be achieved with less volatility along the way. It's something we call risk-adjusted returns. So having a bit of global diversification, uh, the scenario I spoke of, uh each one of them, one, two, and three, was all invested in one country and one index, being the SP 500. That means that the the shocks of uh one country's economic returns for the year is going to be fully felt within this portfolio. Not all countries' returns mimic or or even follow a pattern of tracking the SP 500. While the US might have had an extremely poor negative year, other countries around the world might have had an extremely well positive year. So not having all your eggs in one basket could mean getting the average around the world rather than the big blows of being all in one country. There's plenty of other advantages to global diversification as well. Not what I'm going to get into today, but what I'm getting into here is risk-adjusted returns, meaning you're able to have the same return as a market average as broad as the S ⁇ P 500, but without the the level of volatility outside of uh global diversification. And there's plenty of other smart things that can be done within a portfolio to improve risk-adjusted returns. What wasn't mentioned in any of the scenarios at all is the use of one of the most basic but most powerful things that you can have in a retirement plan, and that being something called a war chest, or what I call a war chest, which is having three years of cash sitting in the bank to be used in big market decline years. That means you're not needing to take assets out of the portfolio just after some of the biggest dips. Now you'll never know if you're in the biggest dip of the retirement years ahead of you because we can't tell the future. But let me share this for a bit of an insight into how much difference having a war chest or implementing that within your plan could actually change the outcome. Let's look up at the uh the the scenario that started in the year 2000, just before the big tech wreak. So it started uh with a balance of$2 million. There was an annual withdrawal of$100,000. But now let's imagine that$300,000 of the original$2 million was held in cash, sitting in a bank account. So that means only$1.7 million was invested in the SP$500 because the other$300 was sitting in a bank account. Now let's look at withdrawals were taken the the three biggest negative years, no withdrawal was made from the portfolio. Instead, the wall chest was used. That means the market returns were only applied to what was left in the S P five hundred uh retirement fund. So if you take out the three worst years between 2000 and 2025, those three years. Was 2008 being the negative 37%, 2002, which was the negative 22%, and 2022, which was the COVID, negative 18.1%. So if you can take those three years withdrawals out of the uh the consideration, because you used the war chest for those three years and no assets were sold from the portfolio during those three years, then with the war chest, the end balance was about 9.4 million. I'll just remind you that scenario two, the end balance at the end of that was$7.6 million. With the war chest, that end balance would have been$9.4 million. So one simple, simple change in implementing a war chest with the same initial investment made the difference of about$1.8 million overall. But besides the effect that a war chest has on the end balance, because let's face it, that's more money that's going to be left behind for inheritance. I'm trying to not to be dismissive of that. That's great, that's going to help a lot of people. But the real value of the war chest is it's another tool that can be used to uh settle nerves of retirees during massive market declines. Without a war chest, perhaps they would start thinking about lowering their lifestyle to not be taking as much assets out of their portfolio or going back to work to replace what the market had had uh affected. Uh neither of those would were either part of a smart retirement plan or never the desired outcome for the retirees. I can assure you of that. Uh I've never sat down with a aspiring retiree who's told me, well, I want to retire now, but in about seven years I'd be more than happy to get back on the tools for a couple of years. With that war chest, that could be one tool that could be used and deployed within the plan when things get really choppy and help keep right retirees on the path of doing the things they actually want to be doing. There's plenty of other things that can be implemented behind a smart portfolio, and I'm sure in future episodes we'll be talking through all of those. But I think I might leave that one here. Uh just to keep it high-leveled and get the message across. Uh do you think that uh you really need to have the most fortunate timing for your retirement plan to be successful? Well, I've just shown you that if you had some of the worst and most unfortunate timing over the last 30 years, in these scenarios with these uh uh assumptions, the plan goes ahead regardless. I I hope this has been useful. Uh if you know anybody that's on the cusp of retiring or thinking about it and might have um uttered the words to you that they're gonna delay that because of what's going on in the world and the uncertainty that's happening. Certainly a conversation I've had two or three times over the last three months. I hope this episode can serve as a useful resource that might be able to get people thinking twice about it. As per usual, of course, if you think that I could be of assistance to yourself or anybody that you know that's in this position, please get in touch at podcast at foxplan.nz. As for this week, that's us.