Tuesday, October 26, 2021

Will Your Nest Egg Last if You Retire Today?

If you’re thinking of retiring today on your own savings rather than a guaranteed pension, how do you factor in the possibility of a stock market crash?  If you’re like many people, you just hope that stocks will keep ticking along with at least average returns.  However, this isn’t the way I thought about timing my own retirement.

I retired in mid 2017.  At the time, stock prices were high, so I assumed that the day after retiring, the stock market would drop about 25% or so, and then it would produce slightly below average returns thereafter.  By some people’s estimations, I over-saved, but I didn’t want to end up running out of money in my 70s and be forced to find work at a tiny fraction of my former pay.

What actually happened in the 4+ years since I retired was the opposite of a stock market crash.  My stocks have risen a total of 60% (11.5% compounded annually when measured in Canadian dollars).  If I had known what was going to happen, I could have retired much sooner.  But I didn’t know, so I have no regrets.  It’s better to have too much than too little.

If you want to retire today, you face an even worse dilemma than I did because stock prices are much higher than they were when I retired.  If I were retiring today, I’d factor in at least a 40% drop in stock prices the day after I left my job.  This isn’t a prediction; it just represents the possibility that stock prices could return to more normal levels in the coming years.

For many prospective retirees, thinking this way means they will have to save substantially more before they can retire, so this is very unwelcome news.  But simply hoping stocks keep climbing could lead to a meagre retirement if markets crash in the near future.

As usual, those who think the way I do and are already over-saving will believe this line of thinking.  Those who want to retire sooner on rosy stock market predictions will dismiss my thoughts.  In most markets, optimistic retirees fare reasonably well, but with stock prices at nosebleed levels, there is the possibility that optimists will be very disappointed.


  1. Hi Michael.
    Do you keep a buffer cash account as well, or do you just make an automated monthly withdrawal based on some kind of monthly average budget? Looking at one of your old posts, are you using "VSB" with the 5 year expense cushion like "Jill"?

    1. Hi Paul,

      I have a spreadsheet that sends me an email whenever my asset allocations get far enough away from my desired balance. This includes my level of fixed income. My percentage in fixed income is a function of my age and the stock market price-to-earnings level (CAPE). Right now, my target is about 23%. When it gets too far below 23%, I get an email telling me to sell some stocks to replenish fixed income (which includes cash). This whole process replaces the need to make regular monthly withdrawals, but there's nothing wrong with doing this on a monthly, quarterly, or annual basis.

      I target a 5-year cushion in fixed income in more normal times. But this is a function of the current CAPE when it is very high as it is now. Right now, my target is just over 7 years.

      I also make sure that a good chunk of my fixed income is just cash in a high-interest savings account, so that I don't face any cash crunch.

      This may seem elaborate, but because it's all coded into a spreadsheet, I don't have to do much.