The Lost Decade 2000-2009

Every time someone mentions the "lost decade," the same warning follows:

"Imagine retiring in 2000. Your portfolio would have been destroyed."

So I decided to test it. I built an Excel model using Canadian, US and international equities, assumed a $1M portfolio, a 4% withdrawal rate adjusted for inflation, and looked at every retirement date from 2000 to 2009.

The results were...not at all what the "lost decade"  crowd (feels like a band name) would have you believe. The famous worst date to retire (2000), exist.  But he's more like a lab rat in a research lab closed test tube. Pushing the analysis against the accumulation reality 5 years prior to that 2000 retiree makes him overly optimistic at best. 

Research link(a small excel file contain past historical results and few formulas) 

A guide to retire in the 2000's

The stats : Canadian Equity market made a reasonable 6% annualized return for the decade 2000-2010. So for us not lost. If we are reasonable and allow a 33% Canadian equity, 33% US Equity, 33% Developped country, then the annualized return is 0%. The US equity made -4% annualized return during that decade and the develop world -2%. 

The 2000 retiree $1M balance would be worth today $200k! What a crisis! 

Except that, all the other dates were a fine day to retire. After 5 years, only 1 other had a drastic reduction to 600k of his initial balance. The majority would have still more than 800k! At the 10 years mark, the 3 retiring years 2000-2002 (just following the 2008 once in 100 years crash) would have a balance around 500k . All the rest, including that unlucky 2007 retiree, have an average balance at the 10 years mark of 1.1M! Not a dent, an easy retirement to follow. 

But the 2000 retiree is still in huge trouble today with a balance of around 200k. Obvious to most human, he could have reduces his pension. A small 90% would be enough to launch his balance on 2026 to 727k. In order to reach his other 2000's retiree, he would have to make a larger 30% sacrifice of his pension.

That looks gloomy. But its not. 9 years out of 10 are happy camper and still enjoy their retirement.  

Is 2000 retiree, a well prepared one, exist?

The 2000 retiree still is worrisome.  Starting at 1M and now having 200k only at 2026 is scary. Looking at his preparation however, he looks like a greedy pig! He is a person that either never prepare for retirement, or simply saw $1M and said now I quit. No preparation.   

Lets dig deeper in this case. Let's assume that this retiree did not get the few lucky 1M ticket in the loto, but rather add been focus on retiring in the next few years. 

Let's retrace the steps of that elusive 1M at 2000 retiree. For that, lets crank back is $1M balance using the return of an all equity (33% Can; 33% US;33% Develop) between 1995 to 2000. Then using a reasonable 7% expected return (no contribution to simplify the calculation) and estimate how long he would have to wait to retire with a $1M balance. Said otherwise, lets look at the $1M 2000 retiree and see when was he able to retire in the past 5 years.

Imagine, its 1995 you are 51 years old and near retirement, still listening to Alanis Morissette,  you plan to retire at 65 in 2009. you got 400k. You have a decent shot to get there. But look at that, you get a 19% return in 1995! Wow. You may get to retire 2 years earlier at 63. Let's hope the market holds. .... but wait 1997, 1998 are also exploding your balance. You made $200k in those 2 years! You may retire at Age 60! Finally, the dream; not quite Liberty 55, but close.   

Finally 2000 hits, you are 56 and got $1M. You can't be more happy, you announce to your boss, I told you I would retire at 65, but heck, lets do it now.  Roll credit, dot-come bubble explodes 2 month later and then 8 years later the financial market crashes again and in early 2026 you hold only $200k... You never looked back. You got a winning streak ticket at the market and roll with it.

Looking only at the end, seems like a sad story. However, you got to retire a decade earlier!   

But! But in sequence of risk the strategy is more Bonds! 100% equity is foolish

It's a pet peeves of mine, but 100% equity often is reasonable if we look under the hood. 

Let's put aside that pesky 2000 retiree. The average balance at 2026 for those retiree between 2000 and 2009, is $2.5M! They double their $1M and then some. But, that's only if they hold 100% equity. The average 60% bonds / 40% equity portfolfio at 2026 is just half that 1.3M. They are in trouble if they are still young. Likely the "Safe portfolio" would lead them to cut their pension. Having equity in retirement is a choose. Not having it is the poor choice.   

As a side note a Risk Parity portfolio of  20% Bonds /  20% Real Estate / 20% Gold / 40% Equity would have return better results. On 2026, the retiree from 2000-2009 would have on avg 2.1M. And as a great note, the 5years / 10 years mark would have kept most of the 1M. Still not convince of that fund, but it's a great alternative. 

Sequence of risk exist. That 2000 retiree is a strong proof. However, looking only at Post Retirement fails to look at what got you there!

60% Bonds / 40% Equity or a Risk Parity, golden portfolio is the way (or is it?)

A pet peeves of mine is that I still do not see the attraction to bonds or gold. The lower return and apparent low risk mitigation do not cut it for me. 

It is very apparent in this case as well. We already saw that after 17-26 years, an all equity portfolio would outperform the 60% bonds/ 40% equity by 2x! I will concede that the a risk parity  portfolio of  20% Bonds /  20% Real Estate / 20% Gold / 40% Equity would have return better results.  

However, again, a retiree is not created out of a thin air surrounded by financial lab mad scientist. (shoot out to the mad scientist blog)  I do not buy that a person seriously considering a risk parity portfolio or a 60% bonds / 40% equity would not be near those asset allocation near retirement. Let's assume that such retiree was fully committed to those asset allocation starting1995-1999 and he wanted to retire on 2000. Could he do it?  

The rapid answer, is no. He would either face a to have a pension of reduction of his pension by 60%-90% before starting to retire in 2000. That's like instead of a pre-emptive strike against ourself and cutting our spending before seeing a cloud in the horizon. 

Alternatively that retiree, may be able to have some flexibility. However, if we use some flexibility rule, then the 100% equity allocation looks a lot better if you can accept a 60% decline in pension. 

I still sense that limiting your initial balance at retirement by taking a more conservative allocation and in retirement leads to worse outcome, even if it support a higher Safe Withdrawal Rate, lower market scare. 

Left on the side of the road

This analysis did not look at the tax implication neither. An educated guess of the impact large loss will lead to tax deductible that can make up a good chunk of the missing revenue.

Looking with the magnifying glass, we fail to recognize that the retiree may have other source of income. Having a 80% cut on the withdrawal while having 50% of your income not affected is only reducing the total income by 10%. The pain level depends on your reliance of that balance to survive. 

Retirement is harder than the above simplification!