Retirement Planning: How an 11.5% Average Return Over 30 Years can Ruin Your Retirement

Average Returns:

Troy Sharpe: If you could have a 11½% average annual returns for 30 years in retirement, would you take that? I bet many of you would but I’m going to show you why that might not be a good idea in today’s video.

Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, host of The Retirement Income Show, and a certified tax specialist. I know some of you are probably thinking, “Troy what are you talking about? If I could lock in 11½% average annual returns for 30 years, why would I not take that?” As I said I’m going to show you. But first and foremost, I want you to understand the foundation of what we call a retirement success plan here at Oak Harvest Financial Group.

What is retirement success? In our opinion, retirement success is you being able to spend as much money as you want to spend the time that you have with your friends, your family, your loved ones without the fear of running out of money. No one wants to die with $6 million or $10 million or whatever that number is. We want to spend as much money as we can to sustain our life, make sure we’re taking care of on the back end, but also to enjoy the time we have left with the people we love most. That’s what retirement success is.

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The first step in our retirement success process is the investment management, the risk management, planning which consists of identifying some guard rails. Now guard rails when it comes to risk management planning, essentially without going into too much depth here we’ll have another video on this, is what is your emotional willingness to the downside of seeing your investment accounts fluctuate in value. If you have a million dollars and you would start to emotionally get upset if the account went down more than 20% or $200,000 in the short term. When you’re in retirement you have no more paychecks. If that’s your downside guard rail, then we want to have a risk management plan in place that gives us a pretty high probability that your accounts would not go down less than that emotional guard rail.

What does that have to do with 11½% annual returns? Well, everything because when we get into retirement and there are no more paychecks and that light bulb comes on, and you say, “You know what? Every dollar I’ve ever saved is all I’m ever going to have. Now I have to figure out how to invest it, how to protect it, how to take income, how to pay less tax. What about healthcare? What about the estate side of things?” All of those decisions are interrelated to one another in every decision that you make, impacts to some extent every other aspect of your financial health in retirement.

Step One:

When we start to talk about step one– This is why it’s step one in the retirement success plan and retirement success process. We have to identify those guard rails because the biggest risk or at least one of the biggest risks you face is what we call sequence of returns risk. When we pull this up, and I like this period from 1969 to 1999, because it’s one of the best 30-year periods in the stock market in modern history.

Inflation during that 30-year period was 5.3%. The S&P 500 averaged 13.4%. When we net out the what we call nominal return, 13.4 minus inflation, we get what’s known as the real return of 8.1%. That’s the amount that the stock market outperformed the rate of inflation. When inflation is high and the stock market is doing well, it’s not that big of a concern as long as you have money invested.

It’s when you get timid and you don’t have money invested or you have the wrong investment strategy, where inflation can absolutely destroy your retirement and it can do so very, very quickly. During this 30-year period, stocks did 13.4% and bonds did 8.6%. An amazing time, especially if you’re a 60/40 type investor, 60% stocks 40% bonds, the average rate of return for that portfolio over a 30-year period was 11½%%. Now before you say sign me up for 11.5% average annual returns all day long, there’s a better question that you have to ask. I’m going to tell you what that is in just a second.

First, I want to show you this chart. For decades in this country, this is ultimately what retirement planning or financial planning in retirement has been. We look at the yellow which is how much do we want to spend or how much can we spend, we determine some type of average rate of return over time and the amount of money that we have.

The red line is the end-of-year balance of your portfolio. On the Y-axis over here, we have the amount of the end-of-year value of your portfolio. This example we’re looking at, the red line starts here, we have about a million dollars. Now the spending level is in yellow. Either we’re starting out here at about $75,000, the reason why we start out at that $75,000 level is because for years, this is ultimately what retirement planning has been. We simply plug in a number to fill in all the variables in the model, and we play with it until this red line exhausts at age 90. Therefore we’ve determined theoretically what is the safe or linear annual spend that we can have with the assumptions that we put into the model.

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Here we could spend about $76,000 if we averaged 11.5% per year, and we had a million dollars to start retirement. Retiring at 60, dying at 90 and we run out of money down here. Gets us through a 30-year retirement. Now, in reality, we probably don’t want to die with zero. I do want to show you what the safe spend level is and what a lot of retirement planning has been. Now, obviously, this is antiquated, although there still are dozens and dozens and dozens of firms out there that still follow this model. It’s not nuanced for a lack of better words. Okay, now getting back to the question that I said is the one that you really should be asking. It’s not how much should we spend. It’s if we’re going to average 11.5% per year in this hypothetical model, what is the sequence of those returns? Because it’s never 11.5, 11.5, 11.5% for 30 years, is it? No, of course not. One year, we might make 21, one year we might lose 10, et cetera, et cetera, et cetera.

If we look at the real-world returns from 1969 to 1999, and you took out that same $75,000, the red line is your end-of-year portfolio balance. If you retire at 60, even though you averaged 11½% over that 30-year period, it doesn’t matter because the first 10 years you essentially ran out of money. When you have the best bull market in US history from essentially 1980 through 1999, it didn’t matter because you didn’t have any money left because the first few years in retirement were so bad. 1969, the market was down. We had the stock market crash of ’73, ’74, and then we got through the rest of the ’70s, it was up and down. We finally got to the ’80s where things started to do really, really, really well. All of your money had been exhausted through the combination of withdrawals and market losses.

This is what we call the sequence of returns risk. Even though this whole period we’ve averaged 11½% by the age of 71, funds are completely exhausted and it has nothing to do except a portfolio that had a downside possibility outside of not just the emotional guard rails, but also what we would call the risk capacity guard rails. Meaning how much capacity does your portfolio have for risk in order to provide you the income that you need? This is what we do here at Oak Harvests Financial Group. We help answer these questions for you.

Now, what if we were to flip those returns on their head and say, instead of 1969 to 1999, the real world returns? What if we just simply flip them around and went 1999, first, 1998, ’97, ’96, ’95, et cetera, through 1969? In reverse, this is the outcome. We start again. We have the end-of-year balance, which is here in red on the Y-xis on the right side of the graph, and then over here we have the annual spend. Now, I didn’t point this out earlier, but it’s very important to point out.

The annual spend, we determined that the the safe spend, if we average 11½% a year, based on old models, what I feel are old models. We could safely spend $76,000 per year, but because inflation was 5.3%, I want you to look to see how devastating 5.3% average inflation is when it comes to your retirement income over a 30-year period. We start out at about 75,000, let’s call it a spendable income. By the time– Excuse me, it’s the yellow line here. By the time we get to year 30 age 90, income is represented on this side of the Y-axis, over $350,000 is needed at 5% inflation to purchase the same amount of goods and services that $75,000 will today.


I hope you can see how devastating inflation can be for a retirement portfolio. Now, if we flip those returns on their head, so this is 1999 to 1969. The end-of-year portfolio balance, again, we’re starting at about a million bucks. Nothing is changed here. We’re taking the same amount out. The only thing that has changed is we’re going in reverse with those investment returns. From 1999 to 1990 is one of the best 10-year periods ever in the stock market.

If that coincides with when you retire and start taking money out, you’re in pretty good shape. Okay. We see the end-of-year portfolio balance. Now, the time we get to the ’70s where the market is starting to struggle, we’ve already amassed almost over $10 million. That’s 10 times our original $1 million retirement investment, and we’ve been taking out hundreds of thousands of dollars for annual income throughout that entire period.

While it may hurt a little to see the portfolio go from 10, 11 million to 8 million, you’re still going to be okay. Now, realistically, if this happened, this is why we talk about having a dynamic spending plan for our clients. We want you to spend your money, we want you to enjoy your money, but we have to stay connected to what that additional spending means for our long-term retirement security. This would be something where I would say, “Hey, look, we’re doing so well. Markets are performing great. Why don’t we consider increasing the amount of money that we’re spending?” Unless you want to pass away with 8 or 10 million bucks.

The point here is both of these charts, the one where we ran out of money by age 71, and this one right here, they both average 11½% per year. The difference is from 1969 to 1999, when you look at it in that chronological order, the portfolio was completely exhausted and there’s no more money. We look at it in reverse chronological order, there’s more money to go around than you’ll ever need. Please, understand that when we talk about guard rails at step one of the retirement success plan and retirement success process here, there’s a reason for it.

It’s because those beginning years, the first few of retirement are the most critical when it comes to taking on market losses and also taking retirement withdrawals. Okay. You see how the sequence of returns risk could absolutely destroy someone’s retirement. It’s why we want to have that risk management and risk discussion as step one in the retirement success plan.

If you don’t have an advisor you’re working with, if you don’t have a success plan in place, if you don’t understand a lot of what I talk about on these videos, it may be a good time to give us a call and let’s sit down and see if you’re a good fit for what we do and if we can add some value to your retirement. All right. Make sure to comment down below, if you haven’t yet already, subscribe to the channel, so we can keep you more connected when we put content out just like this. Our goal is to help you understand more about retirement, be a better investor, be a better planner, and if you need help from us, we’re here.