Monday, 21 September 2009

The Perfect Investment Storm for Retirees

Ever wonder what was the worst possible time to retire? Most people might guess that it was around the time of the Great Depression of the 1930s. That's wrong. The generation of retirees hit hardest since the 1920s was that starting retirement in the mid to late 1960s, just before the perfect storm of the 1970s, which combined a severe bear market in 1973-74 with a period of high inflation. The double whammy of lower equity values along with higher withdrawals to maintain a lifestyle would have depleted a 60% equity 40% bond portfolio about 5 years faster than the worst possible quarter to start retirement during the late 1920s. It wasn't just one or two quarters of retirees that suffered, it was a whole generation of those retiring from about 1962 to 1972. I came across this surprising fact in William Bengen's book Conserving Client Portfolios During Retirement (see figure 5A on page 58). Jim Otar's new book Unveiling the Retirement Myth available at his Retirement Optimizer website shows the same result (page 115 of the green online version, in the chapter on inflation).

It's a reminder to retirees to be concerned about inflation. The last dozen years or so, inflation has been very stable and low - around 2% per year. But will that continue? Certainly it is a central objective of governments but will they be successful in containing inflation if government deficits and borrowing grow out of control?

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