Long-Term Effects of Short-Term Swans
Given the large and sudden nature of Black Swans, it is tempting to think that the worst timing for retirement would be immediately before such an event. Imagine this: you begin retirement near the top of a bull market. You’ve planned your spending based on a nest egg that has grown with that bull market. A few months later, the bottom falls out of the market. Sounds catastrophic, right?
To see how a hypothetical retiree in this position would have fared historically, let’s imagine households with $1 million (in 2020 dollars) in retirement savings, invested 60% in stocks and 40% in bonds, who began retirement six months before each of the Black Swan markets above. Though in real-life retirees’ income should probably change over time based on longevity, economic conditions, and so on, we’ll simplify here and have each hypothetical household spend according to the well-known (though very flawed) “4% rule”. They’ll spend 4% of their initial retirement balance each year, adjusted for inflation.
Below we see how this nest egg fared over time. In the first three historical Black Swan markets, our households would have made it 30+ years into retirement without running out of money. In only one case (1929) would the household have lived through most of this lengthy retirement with less than they had started with. The 1929 case was particularly bad since this household would have had the one-two punch of 1929 and 1931.