Wade Pfau in a Journal of Financial Planning article (October 2011) highlights the fact that even 5 years before retirement a pre-retiree cannot know if they are on track to retire. Why?
Although "...the average compounded annual real return [from a 60/40 portfolio] was 5.26 percent, the variations of returns over five-year intervals is still dramatic, ranging from as low as -8.5 percent for the five years starting in 1916 to as high as 19 percent for the five years starting in 1924..."
Between 1989 and 2009 - a 20-year period - there were 5 five-year periods of near zero or negative returns for a 60/40 portfolio. That is 25% of the time though those negative 5-year periods (less than -3%) never approached the worst periods from 1910 - 1940 (some were greater than -5%).
Some companies refer to the 5 year period before and after retirement as the Red Zone. Out of 135 periods that Wade Pfau reviewed, 21 were negative - that is about 15% of the time. So the experience of the last 20 years is higher than the average since 1870.
It is difficult to get investors to think long-term as even one-year time frames seems long. Yet advisors often discuss long-term time horizons.
In reality, as Pfau states "...a progress report from 10 years before retirement would provide almost no information about the final wealth accumulation. Only 5 percent of the variation in the final wealth accumulation could be explained by the wealth accumulation 10 years earlier. The remaining 95 percent is explained by subsequent market events..."
The key is not to rely on your portfolio of investments (even with only 60% in stocks as in this example) alone to provide you the returns needed to meet your goals. It is important to have a few years (especially prior to retirement) of needed spending in cash.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.