Hypothetical Effects of a Volatile Stock Market on Retirees’ Investment Portfolios

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Abstract

Abstract

This study addresses the question of what might happen to a hypothetical retiree’s investment portfolio if the stock market fluctuations of the past 15 years were repeated in the coming 15 years. The study considers a hypothetical person who retired on December 31, 2014.The retiree is assumed to have an investment portfolio and retired with the intention of selling enough assets each year to provide for living expenses. Remaining assets would be left in the investment portfolio. A projection of portfolio value for each of the next 15 years was calculated using rate of return data for the S & P 500 index for the years 2000 through 2014. To extend the calculation to a 30 year period, an additional 15 years of portfolio values were calculated using the rates of return for the 2000 through 2014 time span. The calculations suggest that if a retiree were to place 100% in stocks and choose a 10% initial withdrawal rate, the investment portfolio would fall to zero in a little more than 8 years. If the retiree were instead to choose a 4% initial withdrawal rate and 100% stocks, the investment portfolio would fall to zero in a little more than 22 years. If the retiree were to alternately choose a 4% initial withdrawal rate and a 50/50 asset mix of stocks and cash, the investment portfolio would similarly fall to zero in a little more than 22 years. If the retiree were to choose a 3% initial withdrawal rate and 100% investment in stocks, a positive balance would remain after 30 years. However, the balance would be far less than the initial portfolio value. The calculations suggest that retirees with the potential to live into their 90s may face a bleak future.

Author

• David A Nugent, Slippery Rock University