Two reasons: There’s a lot of research on this subject, and our own real life experiences.
We live in a world where investment returns are sometimes negative and always unpredictable.
You see, if those negative returns happen early in your retirement, things can get dicey. And if we have back to back negative years early in retirement…..Yikes that’s a whole different thing.
This is what people call the sequence of returns risk. If you retired at the end of 1994, and had 5 straight years of 20% gains in stocks…things looked really good. But, if you retired at the end of 1999, the picture was much different.
You pick a year to retire, and you have no idea if the next 12 to 24 months are going to be good or bad. And unfortunately that has a huge impact on your chances for success.
Let’s look at some real life historical situations. There are two major factors here: withdrawal rate, the annual percentage you take from your savings. And the allocation, the mix between stocks and bonds.
We’ll look at the three WORST bear markets in my lifetime, and I was born in 1971, so that’s where we start.
(Note, all allocations are 50% Stock 50% Bond, rebalanced annually. Stock Market returns are represented by the S&P 500 Total Return and bond returns are the annual total returns of 10-year Government Bonds. Rates of return illustrated are not guaranteed, and past performance does not predict future results)