I Tested a $1.5M Retirement Plan Using Real Data (It Failed)

0:00 Let's say you've built up a $1.5 million portfolio. That feels substantial. Perhaps it feels like enough. Let's say our investor looks at that portfolio and says, "I'm ready to retire." But instead of just assuming it works, let's stress test this portfolio. Let's really put it through the ringer and try to break it so then we can come along and try to fix it. Hey guys, what's up? I'm Erin and welcome back to the channel. To do this, we are going to make this really hard on purpose. We are going to have our retiree walk straight into 1973 market performances. This was a brutal market environment. Double-digit losses in stocks, double-digit inflation right behind it, and one of the worst sequences of returns in history. Now, before we run this, I need to explain something very clearly. I intentionally chose 1973 because this was not a normal or an average time to retire. Rather, this was an absolutely brutal time to step away and start relying on your portfolio. This is one of the roughest sequence histories that we've ever had in the market. So yes, I absolutely cherry-picked this moment, but I did so deliberately because we want to break our plan and then come along and show how small tweaks could actually save it.

1:16 So let's say we have someone retiring at the age of 65. They have $1.5 million invested. They are going to use a fixed withdrawal rate of 4.7% plus annual inflation adjustments. They will receive $25,500 per year from Social Security. They want an income of $8,000 per month. That's $96,000 per year. They have no pension and they're expecting a 30-year retirement. All right, let's run the test. Remember we're using a 4.7% withdrawal rate.

1:51 That's about $70,500 in year one. And every year after that, we're going to increase our withdrawal by the amount of inflation. That sounds reasonable. So, let's see what happens. At first, it doesn't look all that bad. In 1973, the market drops, but the portfolio is still over 1.2 million. In 1974, we have another big hit, and now we're down to about $850,000. That's painful, but maybe it's still survivable. Then 1975 hits. We have a strong market year, and you start to feel like, "Hey, okay, maybe this is fine." But underneath the surface, something has started to happen. Because while our portfolio is bouncing around, our withdrawals never go down. That withdrawal pressure always stays on in full force. By year three, this retiree is pulling nearly $83,000 from a portfolio that just got cut in half. That's close to 10% of the portfolio's value. And this is where the damage starts. As we progress through the '80s and '90s, the market is actually doing quite well, and you might think, "Hey, this is going to save our portfolio." But it doesn't. Because the withdrawals are still climbing. 120,000, 150,000, 180,000 dollars. By the early '90s, they're pulling over 220,000 dollars per year from a portfolio that's under a million dollars. So, what we actually saw was a slow bleed, and by year 24, this plan breaks. So, let's talk about why this failed. First and foremost, we made this portfolio incredibly aggressive. Our investor was 100% in the S&P 500, and this is not typical of a retiree. This gives them a portfolio that has incredibly high volatility at the same point when they're relying on their portfolio for income. That's a really tough combination. Secondly, we misapplied the withdrawal of 4.7%. Yes, Bill Bengen's updated research says that it's more likely today that we can use a withdrawal rate of about 4.7% but there's a huge caveat with that. It assumes a specific type of portfolio, a range of allocations, and importantly some level of realism. You can't just take 4.7% and apply it to any portfolio you want and I feel like this is an important nuance that often gets lost when we talk about safe withdrawal rates. People assume that you can simply take that withdrawal rate and apply it broadly but it's important to know which portfolios it applies to and which portfolios it doesn't. And third, this might be the most important piece of all, we assumed zero human behavior. No adjustments, no course corrections, no reactions whatsoever. This wasn't a sudden out of the blue failure. The plan didn't fail because of one bad year. It failed slowly over the course of decades and this matters because if you saw this happening in real life, if your withdrawals were increasing while your portfolio is falling, you would do something. You might reduce your withdrawals, you might pause your inflation adjustments, you might rebalance your portfolio, you have levers that you can pull on. You wouldn't just sit back and say, "Well, the portfolio is going down. I guess I'm the captain of the ship. I'm going down with it, too." That's just not how retirees behave. And this is a really important reminder for this exercise. I wanted this portfolio to fail. I intentionally wanted to stress it to the point of failure so that we could then come along and fix it. And I want to illustrate how just minor tweaks can have really outsized impact and save this portfolio.

5:27 Before we even talk about the fixes, we need to fix the portfolio, period. Because we tested a 100% S&P 500 portfolio and that's unlikely to be how most retirees would be investing as they go into retirement, especially if they only have limited income streams and they're relying on their portfolio for a large chunk of their income. That's a lot of pressure on a very volatile asset. So, let's make this more realistic. We don't have to strictly go conservative, but we just want to introduce more balance. Let's say we have 70% of the portfolio in the S&P 500 and 30% in bonds or bond-like equivalents. And we'll still use the exact returns of this time period. So, we're still growth-oriented, we're still compounding, we've just introduced more stability. And with that, now that we fixed the portfolio, let's go ahead and add some real-life adjustments that could make this portfolio more resilient. Fix number one, maybe we skip the inflation adjustment in just the first 3 years. Everything else is going to be kept the same. Same withdrawal rate, same portfolio, same terrible starting point. The one and only thing we're changing is that we're going to skip the inflation adjustment for the first 3 years that we're taking draws.

6:43 Now, watch what happens. 1973 to 1975, spending stays flat at $70,500 while inflation is running 6%, 11%, 9%. Normally, following a rigid inflation-adjusted safe withdrawal method, we would be aggressively increasing our withdrawals alongside inflation. But instead, we pause. And this one choice matters a lot because in those early years, the portfolio is under a lot of pressure. The losses are compounding and every additional dollar you take out does more damage. So, by not increasing withdrawals, you're protecting the portfolio when it's most vulnerable. Now, fast forward. Same market, same inflation, but this time, the portfolio never really enters that death spiral, even through the dot-com crash. Yes, it takes a hit. Yes, the withdrawals are still increasing, but the portfolio holds. And by the end of the period, instead of failing, the portfolio still is standing with nearly $3 million.

7:46 And yes, you could consider this a very minor adjustment. We started in exactly the same place, but we simply paused those inflation adjustments when it mattered most, and it saved our portfolio. Fix number two, a bucket strategy. Now, let's try something else. Instead of pulling from our portfolio in those earlier years, let's say we separate our money. Let's say we put about $350,000 in cash or cash-like equivalents. That's roughly 5 years of spending, and leave 1.15 million invested. For the first 5 years, we don't touch our portfolio at all. And this is important, those 1970s years, they weren't just bad for the stock market. Cash at this time was also paying a lot. So, it wasn't uncommon to find CDs that were paying in the ballpark of 10, 11, 12%. So, your cash would likely be keeping pace at least somewhat with inflation. So, what happens? We spend the cash, and we leave the remainder of the portfolio invested.

8:46 Remember, this retiree walked into one of the worst sequences that we've ever had in history. But instead of selling into that downturn, they gave their portfolio time. By the time we start drawing from our portfolio in 1978, it's worth $1.3 million. When the withdrawals begin, we're starting from a stronger position because of what happens next. Fast forward by the late '70s and early '80s, the market starts to recover. From there, compounding takes over, and even through the dot-com crash, the portfolio again takes a hit, but it's coming from a position of strength. Again, it holds.

9:25 We fast forward 30 years, and instead of failing, the portfolio grows to over $5 million. Here, the cash bucket was incredibly powerful because it bought us time. Time to not touch our portfolio when our assets were depressed and under pressure. Fix number three, working three more years. Now, let's do one more scenario. Same person, same $1.5 million at the age of 65 and same market. But now, they do something different. They continue working for three additional years.

9:58 During this time, they're not adding to their investments, they're just working, living off their income, and importantly, leaving their portfolio alone. Now, look at what happens in those first three years. 1973, down. 1974, down again. 1975, strong recovery. And by the end of it, the portfolio is almost fully back to where it started, right back near $1.5 million. That alone is incredible because instead of withdrawing during this tough stretch, we gave our portfolio time to recover before ever touching any portion of it. Now, withdrawals begin in 1976.

10:37 Same withdrawal rate, same rules, but this time, the sequence flips in their favor. From there, compounding takes over. Fast forward through the '80s, strong growth. Through the '90s, even stronger. And even through the dot-com crash, it holds. By the end, this portfolio is sitting at just under $10 million. There was no stress, there was no failure. And I know what you may be thinking, working three more years doesn't sound appealing, and that's fair. But this isn't fully about working longer, it's about timing. When you retire, if the markets turn against you in a dramatic way, if you're able to pause and not pull from your portfolio, maybe that means going back to work, you can give your portfolio time to recover.

11:22 I showed you all of these different scenarios for a reason. There is no one right way to fix this. There are many ways to fix a portfolio, and it really comes down to how you want to approach it. What actually matters most is that you're flexible. If you have flexibility, that is one of the most powerful tools you have when it comes to a retirement. But this does mean one important thing, that your spending can't be completely rigid. It has to have some give. But that doesn't mean you're giving up your lifestyle. It just means introducing simple guardrails.

11:55 Things like skipping inflation raises after bad years, trimming spending slightly when the market is down. And on the flip side, it also giving yourself permission to spend more when things are going well. Because when your portfolio grows beyond a certain point, you can absolutely ratchet it up your spending. You also have structural tools, like a bucket strategy, so you're not forced to sell investments when they're down. Maybe you create stronger income floors. Maybe that's through part-time work or delaying social security. Or even just timing adjustments, like delaying retirement slightly. Every single one of these increases your probability of success. And here is something I want to reiterate, portfolios do not fail overnight. They don't fail because of one bad market year or one inflationary spike. They tend to fail over time.

12:46 You'll notice the portfolio drifting down over time and your draws drifting up and this gap starts widening. And if you're watching this happen in real time, more than likely you are going to act. You're not just going to sit back and say, "Oh, well, I guess this is what has to happen." That's not how real people behave. And it's exactly why rigid, perfect on paper plans fall apart in the real world. So if there's one thing I hope you take from this, you have more control than you think. And even a small amount of flexibility can dramatically improve your outcomes. So what are your thoughts on these small adjustments? Do you have one that feels more appealing and which ones are you planning on keeping in your toolbox? I'd love to hear. Leave a comment down below. I post new videos every single week. If you got anything at all out of this one, please give it a like. If you're new here, please consider subscribing. Or if you know of someone who might get something out of this type of content, please consider sharing.

13:41 I'll see you soon. Bye. Which portfolios There was a lot of word salad. We're going to clean it up. So sorry. The garbage truck is coming. I'm going to pause for a minute. I'll be back. I've hair in my lips.