Spending Money In a Down Market

The stock market has had a volatile few months.  After two years of steady growth, it seems like now every day the market is either up 1% or down 1%.  But, believe it or not, since the beginning of the year, the market (S&P 500) is up over 2% overall.

Today I want to talk a little bit about withdrawing money from an investment portfolio that is not growing.

Faithful followers of the Retirement Revolution already know my core beliefs.

When you retire:

  1. Invest the money in a diversified portfolio of stock and bonds (with at least half the money in stocks).
  2. Begin spending 5% of your portfolio each year starting the very first year you are retired.

At its core, the basic concept is this:  Between now and the end of your life if the above-referenced portfolio does NOT return an AVERAGE of 5% it will be the first time in modern economic history where is has failed to do so.  (source)

In a sense, you are only spending the money that your money is making.

Now when this can sometimes get psychologically tricky are during times of flat growth or even losses in the portfolio.

Let me (poorly) draw a couple pictures to make my point.

In a perfect world, your experience with your portfolio spending plan would look like this:

Wouldn’t that be nice?  Your principal would stay completely stable, and you would simply take the earnings each month.  Unfortunately, that is not how this works.

Here is a more accurate representation of what your experience will probably look like.

There will be times when it feels like you are taking money from an account that is going down.  You will see your principal reducing as you are spending the money. For many people, this could cause some heartburn.

But sometimes (like in the past two years) you might take out your 5% and see that the portfolio grows above and beyond your withdrawals.  “This is great,” you might think, “not only do I get to enjoy the money I’m withdrawing, but my account is actually growing.”

In order to get the most LIFE from your MONEY, you need to come to terms with the fact that the markets do not move in a perfectly straight line.  The may temporarily go down but they permanently go up. As Warren Buffett points out, in 1900 the Dow Jones was 66 points. As of this writing, the Dow Jones is trading at over 24,000.

Let me illustrate this point with a quick story.

Imagine you retired in 1997 with $500,000.  You invested the money in 60% stocks and 40% bonds.  You then initiated the 5% withdrawal.

You decide to move to a remote Caribbean island.  No internet, no TV, no way to check up on how your money is performing.  You are off the grid.

For the next 20 years, you have no idea what is happening with your money.  All you know is that each month money gets deposited into your Bahamian bank account.

After 20 years you come back to the states, very tan, possibly sporting dreadlocks.  You go to your financial advisor’s office anxiously wondering, “Do I have any money left?  Over the past twenty years, I’ve received $500,000 from my portfolio. Am I broke? Is the party over?”

Now, remember this particular 20 year period was one of the worst in American economic history.  In 2000 and 2008, we experienced two traumatic recessions. The 2000’s are sometimes referred to as “the lost decade” due to the fact that the Dow Jones basically broke even during that time.

So, now in 2018, do you have any money left?

Yes, you do.  In fact, your portfolio has grown to $991,000 (data via AmericanFunds.com).

How did this happen?  Bonds had a great run the past 20 years, and besides the “lost decade” the stock market has performed extremely well.

But think about this for a second.  Imagine if you DID watch your investments every day.  You would have seen losses in 2000 and 2001 and 2008. You probably would have stressed and possibly panicked (and panic often triggers emotional investment changes).

So what’s my point?  You need to trust the process.  If you want something that is going to move in a perfectly straight line you are better off in a bank CD paying 1%.  But 1% and 5% represent a huge difference in your lifestyle.

If you want to truly enjoy the fruits of your labor you need to keep your money working for you.  To get the most from your money, you need to harness the long-term power of stocks and bonds. Trust me, I wish they went in a perfectly straight line too (it would make my job a lot easier).

So if we have a flat or negative year in the markets, just relax, sit back, and say to yourself, “It will all work out in the end.”  Why? Because throughout modern economic history spanning the past 80+ years, it always has before.

Be Blessed,

Dave

1- as measured by the S & P 500
2- as measured by the Barclay’s Aggregate Bond Index
The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
The value of fixed-income securities may be affected by changing interest rates and changes in credit ratings of the securities.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Indexes are unmanaged portfolios and individuals cannot invest directly in an index.  Actual results will vary.
This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.
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