Are Year 2000 Retirees Safe Yet?

 Valuation-Informed Indexing #359 on the history of the US market and whether retirees from before the dotcom bubble should get comfortable

by Rob Bennett

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Stock valuations have remained shockingly high for almost the entire time-period from 1996 forward, over two decades, which is almost unprecedented in the history of the US market. Buy-and-Holders see that as good news. Since Buy-and-Holders go with high stock allocations at all times, they reaped the benefits of the huge upswing in prices that we saw in the late 1990s. And they haven’t had to pay as high a price for ignoring valuations as have Buy-and-Holders of the past because valuations have remained high for the longest stretch of time in the history of the US market.

Valuation-Informed Indexers see things differently, of course. We view returns above the average annual return of 6.5 percent as a mirage, cotton-candy gains that are paid back in the secular bear market that always follow a secular bull. It is our view that periods of high returns make effective financial planning impossible because they cause nominal portfolio values to get so out of whack. For us, the only thing worse than high valuations that remain in place for a normal length of time are high valuations that remain in place for an historically long length of time.

The differing views held over the status of the Year 2000 retiree 18 years into retirement illustrate the conflict in visions in a compelling manner. From the perspective of the Buy-and-Holder, the 2000 retiree is doing well. From the perspective of the Valuation-Informed Indexer, the 2000 retiree is in a good bit of trouble.

Say that a retiree left the world of work in January 2000 and employed the then-popular 4 percent rule to plan his retirement. Perhaps the retiree held a portfolio of $1 million and planned on living on $40,000 per year from his portfolio plus the amounts available from Social Security and other sources. This investor had nothing close to what the experts said he needed for retirement before the bull generated the turbo-charged gains of 1996 through 1999. So the investor was extremely lucky. Those turbo-charged gains came along just in time!

The Valuation-Informed Indexer does not see things in quite the same way. We say that there is no 4 percent rule, that valuations must be considered when calculating the safe withdrawal rate. Add a valuations adjustment and the 4 percent rule becomes the 1.6 percent rule for those who retired at the height of the bull.  So the retiree who began taking out $40,000 per year from a $1 million portfolio in January 2000 was accepting a great deal of risk by doing so. Looking at the history of the US market, return data indicates that that retirement had only a one in three chance of surviving for 30 years.


The odds changed changed dramatically when the retirement got through its first 10 years without taking a major hit. Price crashes that take place in the early years of a retirement have a counter-intuitively high negative effect on the retirement’s chances for long-term survival because early-year hits effectively reduce the size of the starting-point portfolio amount. A portfolio from which a 4 percent withdrawal is going to be taken that is diminished by 50 percent in the first year of retirement has the odds of survival of a portfolio from which an 8 percent withdrawal is going to be taken. This is why it is so important to consider the valuation level that applies when a retirement begins; the odds of seeing a price crash are dramatically greater when valuations are sky high.

The odds for survival of a Year 2000 retirement were poor at the time the retirement began (presuming that the retiree employed the popular 4 percent rule). But the odds for survival have increased now that we are nearly 18 years down the road because we did not see a lasting price crash during the first 10 years of the retirement.


The usual rule that a retirement is safe if it does not experience a price crash within the first 10 years may not apply this time around. The annualized real return for stocks from January 2000 through December 2016 was 2.27 percent. A portfolio from which a 4 percent withdrawal was taken 18 times would be reduced to under $700,000.

That’s obviously not good. But in ordinary circumstances, this retirement would be highly likely to survive 30 years because the hit that it had to take as a result of the starting-point valuation level would be in the past. When stocks are priced at reasonable levels, returns are good enough to support withdrawals of a good bit more than 4 percent. So the lost ground could be made up over time.


Stocks are priced today at two times fair value. The price we must pay for not having experienced a lasting price crash despite the high starting-point valuation level is that a lasting price crash remains unfinished business. There has never in the history of the US market been a secular bear market that ended before the P/E10 level dropped to 8 or lower. A drop to 8 would take the value of that $700,000 portfolio to something in the neighborhood of $200,000. A retiree who continued to take $40,000 withdrawals from a portfolio of $200,000 for another 12 years would be asking for trouble.

The return sequence that we have seen from 2000 forward has been an unusual one. I can see why many Buy-and-Holders believe that the Year 2000 retirements are now out of the woods. But I am not so sure. It depends on whether the lasting price crash that we should have been expecting within ten years when those retirements began has been permanently evaded or merely temporarily postponed.

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