Plan for flat 10 years, just in case

Today’s discussion could save you a lot of heartache when it comes to your retirement nest egg. That is…if you are not at or near retirement. If that’s you, I’m too late. If you are the type of person I can help the most, in your 20s or 30s, you are least likely to read or follow my recommendations. But I must try, and try I shall. So here’s the advice:

Assume that the 10 years just prior to your retiring your investments will average a total of zero percent return. That’s right, zero, nada, 0, nothing.

If I have a 56-year-old in my office who is planning on retiring at age 66 and wants to know what they should expect out of their investments for the next 10 years, I tell them zero (this works in both dollar and percentage terms). The reason is in history. The stock markets have had periods where, not only is there no growth across 10 years, but you might end up with a little less than you started.

This is a problem even for those who have more time to plan. If you were counting on a particular rate of return from your portfolio over a 40-year period, you’ll be in trouble if the last 10 years gives you nothing. For example, let’s assume you are 26-years-old and want to retire at 66 with a nest egg of $3 million. Assuming an 8% rate of return, you determine you must put in $860 per month starting today. So far, so good.

But what happens, when at 30 years in, we begin a decade with zero returns? You would have less than $1.3 million in your investing account—that’s less than half of what you wanted by age 66. That’s right—the very decade that you need to more than double your money in you might end up getting diddly-squat instead.

The easiest way (at least on paper) to protect against this is to back up your goal by 10 years. While this might make you immune to a flat decade, there’s a little reality check that goes with it. Since in our example you only have 30 years to save, your per-month savings rises to over $2000 per month—more than double what you needed to save under the 40-year plan.

Mathematically, it makes sense…you’re guarding against a situation where you’ll have less than half saved, so the answer is to more than double your savings. But just because it makes sense doesn’t make it palatable or possible for most savers.

To be clear, if you hit a flat decade just before retirement all is not lost. You’ve either got time for the markets to get going again or you really don’t need that much money. But we’re human, and markets like this create some uncertainty which can lead to worry, and then panic. Panic makes people do stupid things.

So fear not. Instead know that this is a possibility, and then know what you are going to do to mitigate the problem. Are you going to save more each month, be prepared to delay retirement, or work out a smaller budget? By planning for all or many of these scenarios, you reduce your chance of waking up to a not-so-fun surprise when it’s time to retire.

This article was published in the Wichita Falls Times Record News on October 20, 2013.