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How Can a 100-Year Flood Help You Plan for a Better Retirement?

How can a 100-year flood help you prepare for a better retirement?  We will show the impact a generational event can have on a retirement account.

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The "Once in a Generation" Event

How can a 100-year flood help you plan for a better retirement? When residents here in the Mid-Ohio Valley think of floods, they think of 2004. It was the last time that we saw a significant flood with a lot of damage. Before that, the last similar flood we experienced was in 1964.

If you are not familiar with our area, you might remember seeing headlines about Texas. A massive winter storm created lots of damage this past winter. It left thousands without power and water. It was an event that had not happened in many years.

We see similar things in the stock market. From time to time, we have these devastating, once-in-a-generation events. The last one was the Dot Com crash. We saw the stock market generate three consecutive years of negative returns. Stocks fell in 2000, 2001, and 2002, and the total drop was about 50%. 

The impact it had on retirement accounts generating income was significant. It was more significant than the Great Recession.

The last time that we experienced consecutive down years in the stock market was in 1973 and 1974. Before that, it was in the Great Depression.

Comparing the Dot Com Bust to The Great Recession

Some people think of 2008 as being that generational event. But the Dot Com crash was worse. We created these charts to compare the impact consecutive down years had on retirement accounts to one big down year. We wanted to compare the effect on account values and withdrawal rates eight years later. Here are the parameters:

  • Initial withdrawal rates of 4%, 5%, and 6%.
  • The withdrawal amounts remained constant.
  • The allocation was 60% stock and 40% bond.
  • Accounts were rebalanced each year to maintain that 60% stock 40% bond mix.
  • The proxy for stocks was the Vanguard Total Stock Market Index fund.
  • The proxy we use for the bond market was the Vanguard Total Bond Market Index fund.

4% Initial Withdrawal Rate

The first chart shows a 4% initial withdrawal rate. The initial balance started at $250,000. Eight years later, after the Dot Com crash, the account fell to $156,000. After the Great Recession, the account dropped to $197,000. The initial withdrawal rate began at 4%. By the eighth year, the account started at the beginning of the Dot Com crash saw the withdrawal rate grow to 6.1%. After the Great Recession, the withdrawal rate increased to 4.7%.

5% Initial Withdrawal Rate

This chart uses a 5% initial withdrawal rate. Eight years after the Dot Com bust, the account fell to $132,000. The other account dropped to $172,000. The three-year stretch also affected withdrawal rates. The beginning withdrawal rate of 5% grew to 8.7% after the Dot Com crash. It grew to 6.5% following the Great Recession.

6% Initial Withdrawal Rate

Increasing the initial withdrawal to 6% had an even bigger effect. The account value, eight years after the Dot Com crash, was only $108,000. After the Great Recession, the account decreased to $147,000. The impact to the withdrawal rate was substantial. The withdrawal rate following the Dot Com bust ballooned to 12.3%. Following the Great Recession, the withdrawal rate climbed to 8.9%.  At those levels, those withdrawal rates will add significant risk to the accounts.

How Does This Help You Plan for A Better Retirement?

Another one of these events could happen in the future. It is a matter of when and not if. Higher withdrawal rates place more pressure on your retirement savings. Those 100-year floods keep the “4% Rule” in the back of our minds.

We have seen people take between 5% and 7% from their accounts and have success. But the returns must work in their favor. If we experience one of these “100-year floods,” higher withdrawal rates increase your risk of running out of money.

For many, their primary retirement goal is not to leave money for their kids or grandkids. Most people want to make sure their retirement savings does not go to zero before their blood pressure does.

Talk to a Certified Financial Planner™ Professional


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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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