How long could you live off your portfolio if the worst happened?

[Pete12]

I know there have been threads in the past about "stress-testing" a portfolio but I was looking for some real examples to compare to. I just did a stress test of our portfolio using the following rules:

- Both myself and wife lose our jobs and never work again (we are actually both self employed so in our case I assume we both go out of business.)
- Stock market permanently declines 50% and does not recover. Bonds remain the same.
- Portfolio does not grow at all after this happens- no dividends, no interest
- We remain in our current home, paying the mortgage and bills as scheduled
- We continue to pay other expenses such as kids school fees (K-12), health insurance, life insurance premiums etc.
- We cut back on all other discretionary expenses such as eating out, vacations etc.
- When kids go to college they will have to take loans / other financial assistance etc.
- Ignored inflation

In reality I am sure we would have to cut back way more than this (for example downsize our home) but let's keep it simple for now.

Based on this, I estimate our current portfolio of retirement accounts and taxable account would last about 9 years. I am 44 and wife is 46 so we would obviously have a ways to go before social security / medicare kicked in.

I would be curious to see how we stack up against other Bogleheads. Having run this exercise I do feel fairly good that we would be able to survive although of course the prospect of this actually happening is quite scary

Best wishes,
Pete

[TomatoTomahto]

Stock market permanently declines 50% and does not recover

What happens to bonds? Inflation?

[Kenkat]

Around 10 years - ages 56 and 54. I could quit work tomorrow and probably be ok, but going to keep banking pension credits, 401(k), etc. for a while longer.

[Pete12]

Stock market permanently declines 50% and does not recover

What happens to bonds? Inflation?

Good point, I assumed bonds remained the same, and I have ignored inflation. Have edited post.

[JBTX]

I'll assume for us that would mean a 33% drop in networth, given bonds in portfolio. At current spending levels, we would be at about a 5% withdrawal rate. I'm mid 50s DW low 50s. Then within 5 years I could, if needed, apply for early SS and maybe also get adult child disability for son. At that point we should be able get by on a SWR of somewhere between 3-4%.

This is exactly the type of exercise anybody who is contemplating retirement any time soon should do.

[Doom&Gloom]

Until I die or run out of money, whichever comes first. (Already retired.)

What is "the worst?" I recall some official talking about the devastation and aftermath from Hurricane Katrina. He said they had run all sorts of simulations but the worst case in reality turned out to be worse than their worst case.

[7eight9]

We currently spend ~$18K excluding vacations (no debt). In your scenario we would have to acquire health insurance. By doing Roth conversions we would qualify for a premium tax credit. $25K Roth conversions would qualify for $1K/month premium tax credit so it looks like Bronze plans would be free and Silver plans would start at $100/mo. So say $2K for heath insurance. Now we would need $20K. Portfolio would last longer than either of us will.

ETA - Without jobs gasoline usage would decrease and it would make sense to sell one car additionally eliminating registration and insurance fees.

[TNWoods]

My house is paid off, my lifestyle is very frugal.

If my investments reduced in value by 50% and stayed there, I would be good for at least 25 years. This includes receiving social security, though.

TNWoods

[Dottie57]

Stock market 50% down. All else stays same.
SS exists at 75% current payout.

I would probably die before depleted. 70% plus or minus 5% in bonds.

[pasadena]

About 7 years without accounting for taxes when drawing from 401(k) (ah!).
About 9.5 years if I went home and rented an apartment (lower COL and future-proofing my health with free healthcare).
About 14 years if I went home and lived with my parents.


(still not accounting for taxes, so...)

[livesoft]

If equities dropped 50% and bond funds stayed about the same, I think we could live at least forever or more on our portfolio at our current rate of expenditures. Why is that? We are retired and not yet receiving SS benefits, but those are coming.

[TomatoTomahto]

If bonds don’t go to 0, and inflation stays reasonable, we could survive indefinitely. The kids’ inheritances might suffer a bit. We are spending fairly lavishly (in COVID terms), but could easily back off on everything but property taxes.

[SethJane42]

If my portfolio was cut 50% tomorrow, and there were no further gains or dividends, and I lived frugally and only ate 1 package of Little Debbies a day instead of two, I could live 30 years. Although, I only have about 25 left in me. Years, not Lil Debbies.

[Juice3]

Today:
N = S*N + B*N
Y = N / E

Scenario:
Bad equity markets loss 50%
Ignore inflation
Ignore growth

Scenario:
N' = .5*S*N + B*N
Y' = N' / E'

As others have pointed out. How E changes is more interesting part of this question. This why we often talk about necessary and discretionary E.

For example a 100/0 portfolio, Y'=Y is E' = .5* E.


N - Nest Egg in dollars
S - Stocks as a percent of N
B - Bonds as a percent of N
E - Expenses dollars per year
Y - Years money available to fund

[rixer]

If it came down to it, I could last longer than I have years to live. I'm retired, live in a smaller house compared to today's homes so it's cheaper to heat and cool,It's also paid off and we carry no debt, have medicare and Social Security pays for most all our neccessary expenses.
Now that's more of an existance than anything else but we could do it. (if we had to... I hope we don't)

[arcticpineapplecorp.]

you're arbitrarily defining the worst case scenario.

50%?

The stock market fell further than that in the Great Depression.

Did stocks stop paying dividends? No, in fact some years they paid double digit dividends.

If stocks never grew again, that would have to mean the economy was permanetly destroyed. Nothing new, no advances. declining standards of living. Why would stocks any value at all? The value of stocks is based on the discounted present value of future earning/cash streams. You're assuming in this scenario that whatever we make today, we'd only continue making but nothing more?

Likely deflation would ensue, which would make your cash more valuable. You could buy more stuff with fewer dollars (the opposite of inflation).

Why would bonds stop paying interest? Bonds are a contract to pay a defined amount of interest for a set period of time. If that stopped, wouldn't the value of those bonds drop (i.e., this is called a haircut in which creditors have defaulted on bond holders). New bonds issued would have to pay higher rates of interest because they're riskier. I suppose if you had individual bonds they could default. If you own a fund the value would drop, but you'd start getting more interest each month, right?

nothing's ever static. the only constant is change.

[musicagogo]

I guess our definition of worst case scenario economically is very different. I worry about real regime/economic change and frankly, I don't have a good solution for that worst case scenario now that I am retired. All would be lost. Find whatever work I can. Too gloomy to really contemplate.

In your scenario, I would tighten my belt considerably and probably be ok until we died~40-45 years hence. But hard for me to believe that under our current system there wouldn't be some growth-even if it takes 10 years.

[jsapiandante]

We are currently in our mid to late 30s. If our portfolio dropped 50% and stayed there we’d survive for 7-8 years if we kept the same expense that we have now. All the more reason why we are trying to achieve financial independence as soon as possible (hopefully in 3-4 years). I’d bet that we’d probably adapt though to survive. We always have even we had very little. We’d sell our house and live in a LCOL if we really have to.

[johnegonpdx]

13.5 years on cash + investments.
19.0 years if I sold off my home and started renting at around the same monthly expense for mortgage + insurance + property tax escrow.
That was a surprisingly interesting exercise.
Thanks.

[flyingaway]

The worst would be social security disappears and the U.S. government defaults bonds.

[sandan]

The worst would be social security disappears and the U.S. government defaults bonds.

Slacker.

Worst case scenario is that you cannot live of your portfolio at all. Bonds/stocks etc. are all in essence just contractual obligations.

[Sandtrap]

Hopefully, A few generations after my passing.
Thus the importance of estate planning.

Or, if the worse of the worse happens, it won't matter.
j

[VAslim16]

In that scenario I estimate I could live off it for about 5 years. Yep...still work to do here.

[mmmodem]

Your worst case scenario of 50% loss in investments is 12.5 years if one retires using the 4% SWR. That means you can either look at it as 9 years worst case scenario or look at is as you have 18x expenses. You are 7x away from retirement or 15x if you use a more conservative 3% SWR.

Well, I'd rather say I have 25x expenses instead of saying I can last 12.5 years under your worst case scenario. Whatever floats your boat OP. Glass is half full over here.

[zaboomafoozarg]

Forget the 0.5% SWR, we need to plan for withdrawals that decrease by 5% every year.

[tiburblium]

There is also upside risk to those who have too little invested in investable assets.

Perhaps the ammount you have saved in dollars is sufficent today, but it may not be sufficent tomarrow.

[Grt2bOutdoors]

Stock market permanently declines 50% and does not recover

What happens to bonds? Inflation?

Good point, I assumed bonds remained the same, and I have ignored inflation. Have edited post.

A depression would ensue, you would have deflation not inflation. A depression is a vicious cycle. I would expect expenses to decrease in a depression by how much I don’t know.

[flyingaway]

Forget the 0.5% SWR, we need to plan for withdrawals that decrease by 5% every year.

A negative SWR? I think it means going back to work, if I can find a job then.

[HomerJ]

I know there have been threads in the past about "stress-testing" a portfolio but I was looking for some real examples to compare to. I just did a stress test of our portfolio using the following rules:

- Both myself and wife lose our jobs and never work again (we are actually both self employed so in our case I assume we both go out of business.)
- Stock market permanently declines 50% and does not recover. Bonds remain the same.
- Portfolio does not grow at all after this happens- no dividends, no interest
- We remain in our current home, paying the mortgage and bills as scheduled
- We continue to pay other expenses such as kids school fees (K-12), health insurance, life insurance premiums etc.
- We cut back on all other discretionary expenses such as eating out, vacations etc.
- When kids go to college they will have to take loans / other financial assistance etc.
- Ignored inflation

In reality I am sure we would have to cut back way more than this (for example downsize our home) but let's keep it simple for now.

Based on this, I estimate our current portfolio of retirement accounts and taxable account would last about 9 years. I am 44 and wife is 46 so we would obviously have a ways to go before social security / medicare kicked in.

I would be curious to see how we stack up against other Bogleheads. Having run this exercise I do feel fairly good that we would be able to survive although of course the prospect of this actually happening is quite scary

Best wishes,
Pete

Forever, if SS doesn't get cut. Probably even if SS does get cut. House is paid off. Food and utilities just don't cost that much. Sure, we won't travel anymore, but we could definitely survive... Got a 45/55 portfolio, and the 55% in bonds/CDs/cash isn't small.

But we're not 44 and 46... we are 51 and 59 (my wife is still smoking hot at 59, and it's just a huge bonus that she can start pulling SS in 3-4 years).

[Robot Monster]

There is also upside risk to those who have too little invested in investable assets.

Perhaps the amount you have saved in dollars is sufficient today, but it may not be sufficient tomorrow.

True. Someone invested in cash has to worry about the chasm, or disparity, between inflation and interest rates. How wide could that chasm get? Could the Fed change it's 2% inflation target to 4%? The Bloomberg article below presents that as a possibility. Not to mention the (perhaps negligible?) possibility of hyperinflation. If someone is cash heavy, and risk averse, they might consider TIPS. TIPS would also fare well if negative interest rates came to the US; oh yes, that another cash-holder's risk.

***

From May 7th, 2020 Bloomberg article, "Inflation Is the Way to Pay Off Coronavirus Debt"
"...But there’s another way that the government can shrink the mountain of debt weighing down the U.S. economy: inflation. Because most interest payments are fixed in nominal terms, inflation makes existing debt less important in real terms. Raising the long-term inflation target from the current 2% to a still-modest 4% would substantially increase the rate at which debt effectively vanishes...."
https://www.bloomberg.com/opinion/artic ... virus-debt

[Pete12]

you're arbitrarily defining the worst case scenario.

Correct, for the purposes of this exercise only.

[1210sda]

Interesting exercise.

Being retired, "losing our jobs" would not have an impact on us.

For that reason, my answer would not be relevant to what OP is asking.

[Dottie57]

There is also upside risk to those who have too little invested in investable assets.

Perhaps the ammount you have saved in dollars is sufficent today, but it may not be sufficent tomarrow.

OP said he was not including inflation.

[Kelrex]

I...don't know. Hmm.

Very little of our NW is in stocks and bonds, so I'm trying to imagine what our worst case looks like. We have A LOT of redundancies built into our system. We could lose all of our stocks and bonds and be fine indefinitely.

It's also impossible to imagine not being able to pivot and find some kind of work, probably because I just did that after a truly epic worst case scenario year myself. Ugh, it was ugly. Career ruining ugly.

If I truly couldn't work and only had 50% of our meager stocks and bonds, I'm sure I would figure out how to barter my way to pretty comfortable lifestyle. Again, I like to have a lot of options.

[Pete12]

It's also impossible to imagine not being able to pivot and find some kind of work, probably because I just did that after a truly epic worst case scenario year myself. Ugh, it was ugly. Career ruining ugly.

If I truly couldn't work and only had 50% of our meager stocks and bonds, I'm sure I would figure out how to barter my way to pretty comfortable lifestyle. Again, I like to have a lot of options.

Exactly... I am assuming a domesday scenario here. I am sure if we both went out of business we’d be out hustling to bring something in as income...

[JoeRetire]

I would be curious to see how we stack up against other Bogleheads.

If necessary, my wife and I could live 40 years with your "worst case" scenario.

We are 66 and 65 years old. Color us not worried.

[hulburt1]

I'm 67. At 7 ss=26000
pension 10000
have 1.3m
house paid off.
2 paid for cars.
Easily live on 3000 a month.
Last 2 months being grounded live on less then 1000. I could live without phone, Tv. but must have daily fix of Bogleheas.org
I've 25 year old shirts I still put on. They do seem to shrink during the winter.
I have 1 acer if need to put in garden but the deer beat me to it. Yes I do have meat.

[FrankTheViking]

Given the criteria we'd have 1 year. 2 if we moved in with family which would be possible considering the extreme scenario. In our mid twenties.

[Pete12]

If necessary, my wife and I could live 40 years with your "worst case" scenario.

We are 66 and 65 years old. Color us not worried.

God bless you!

[loukycpa]

I have this simple spreadsheet. When I update my holdings, it calculates how much I could withdrawal monthly in retirement using a 4% withdrawal rate. My nest egg is around $1.15M currently, so 4% is $46k annually, or about $3,800 a month.

4% withdrawal rate means nest egg is 25 times annual spend.

I have a 50 stock/50 bond portfolio. So in theory I can withdraw that $3,800 a month for 12.5 years without having to touch the equity side of the house.

I'm 47 & wife is 45, debt free, love the home that is paid off, fairly low cost of living area. Three snowflakes in different stages of development, hopefully someday self supportive. I stubbornly refuse to track spending because it annoys me to do it. I know we save/invest a significant percentage (40%+) of our income right now. I'm guessing the spending side averages out to somewhere between $7k and $9k a month. Sometimes it feels like we are living like a couple of drunken sailors. We could cut a lot out I'm sure.

I don't plan to FIRE anytime soon on $3,800 a month, especially not without health insurance. So off to work we go. But if it were forced upon us it is nice to know that we could. We would be trying to earn something. Accountant and teacher. Surely someone would pay us to do something productive.

[casun]

27.2 years

[mortal]

I mean, the worst case scenario is a nuclear exchange and the total collapse of civilization.

Look man, I'm financially independent at a 3% SWR. That withdrawal rate has survived two world wars, the collapse of a super power, etc. If that SWR fails, the world is likely in such bad shape that I wouldn't be around to 'live' off anything.

[flaccidsteele]

I would be curious to see how we stack up against other Bogleheads. Having run this exercise I do feel fairly good that we would be able to survive although of course the prospect of this actually happening is quite scary

If the US burns like Rome, I wouldn’t be able to survive very long

That would be the worst

[000]

I know that this is a deliberately contrived example, but I feel I must say that -50% should not be regarded as a lower bound for stocks.

c.f. Great Depression

[auntie]

I should be able to last around 40 years, until I'm 115. Not worried.

[finite_difference]

If this were to happen, and I could not find work, I’d liquidate everything and move in with family, or to a very inexpensive part of the US, or an ultra low cost of living country like Mexico or China since I could finish picking up either language pretty fast at this point.

Unless you become disabled I don’t think never being able to work is realistic though. Maybe consider some disability insurance if you haven’t to address that concern?

[HomerJ]

I mean, the worst case scenario is a nuclear exchange and the total collapse of civilization.

Part of me wants to spend $10,000 to stock up just in case that happens (my parents have a farm way out in the country)

But my wife would never let me spend "waste" that much money on supplies and seeds and books and ammo.

But if it ever happens, and all our electronic ones and zeros end up meaning NOTHING, I'm going to be very sad I didn't turn a tiny fraction of my portfolio into those material goods.

[flaccidsteele]

I know there have been threads in the past about "stress-testing" a portfolio but I was looking for some real examples to compare to. I just did a stress test of our portfolio using the following rules:

- Both myself and wife lose our jobs and never work again (we are actually both self employed so in our case I assume we both go out of business.)
- Stock market permanently declines 50% and does not recover. Bonds remain the same.
- Portfolio does not grow at all after this happens- no dividends, no interest
- We remain in our current home, paying the mortgage and bills as scheduled
- We continue to pay other expenses such as kids school fees (K-12), health insurance, life insurance premiums etc.
- We cut back on all other discretionary expenses such as eating out, vacations etc.
- When kids go to college they will have to take loans / other financial assistance etc.
- Ignored inflation

Using these rules, I could survive indefinitely

Ironically, in times where America experiences massive job loss and the stock market collapses by 50%+, people go from being homeowners to renters. They go into conservation mode

This is exactly what happened when I was purchasing rental real estate during the Great Recession. Nobody could afford giant expenses for shelter, and prospective tenants were a dime a dozen. Many of my tenants were former homeowners

After replacing my entire household income, I retired in my 40s

The side benefit of having these rentals is that they give my stock portfolio complete autonomy to do whatever it does for however long it wants to take to do it

Also being Canadian, I don’t have any healthcare cost concerns

Post-secondary education is inexpensive up here too. Like really inexpensive

[Grt2bOutdoors]

I mean, the worst case scenario is a nuclear exchange and the total collapse of civilization.

Part of me wants to spend $10,000 to stock up just in case that happens (my parents have a farm way out in the country)

But my wife would never let me spend "waste" that much money on supplies and seeds and books and ammo.

But if it ever happens, and all our electronic ones and zeros end up meaning NOTHING, I'm going to be very sad I didn't turn a tiny fraction of my portfolio into those material goods.

I keep a normal stock of a few weeks of non perishable, it’s a fraction of the cost your talking about. Even if you bought that much in supplies, how long do you think you’d survive?

[Doctor Rhythm]

If workplace pension plan remains intact, the portfolio would be perpetual. Unless "the worst" involved murder hornets - then all bets are off.