Why 1968 was a worse year to retire than 1929

(P1) An analysis from William Bengen, the financial researcher who created the 4% rule, concludes that 1968 was a worse year to begin retirement than 1929, challenging the conventional wisdom that stock market crashes are the greatest threat to retirees. The real danger, his research shows, was the sustained high inflation of the 1970s, which peaked at 13.5% in 1980 and rapidly eroded portfolio values despite a less severe initial market downturn.

(P2) "Dealing with inflation is a lot more problematic than dealing with a bear market," Bengen said in an interview with Barron's. "Once you increase your withdrawals, it’s effectively permanent. You’re unlikely to decrease them."

(P3) Bengen’s model tested a $100,000 portfolio with a 65% stock, 30% bond, and 5% cash allocation. A retiree starting in October 1968 with a 4.66% annual withdrawal rate, adjusted for inflation, would have depleted their entire portfolio to zero within 30 years. In contrast, a 1929 retiree using the same withdrawal rate would have finished their 30-year retirement with an inflation-adjusted balance of $105,000, 5% more than they started with despite the Great Depression.

(P4) The findings serve as a critical warning for today's retirees, as parallels to the 1970s emerge. With inflation running above the Federal Reserve's 2% target and soaring energy prices, the risk of a new stagflationary period is rising. This historical precedent suggests that investors may need to reconsider portfolio allocations to protect against the long-term corrosive effects of inflation, rather than focusing solely on short-term market volatility.

The Inflationary Killer

The core of the problem lies in how inflation interacts with withdrawal strategies. The 4% rule, which Bengen later updated to 4.7%, assumes retirees withdraw a percentage of their initial portfolio, with that dollar amount adjusted upward for inflation each subsequent year. During the stagflation of the 1970s, this meant withdrawal amounts ballooned, rapidly eating away at the principal.

The portfolio of a 1968 retiree fell to less than $41,000 in constant dollars within just six years and never recovered. By year 24, only $20,000 remained. Conversely, the 1930s experienced deflation, meaning retirees' annual withdrawals actually decreased for four years, preserving capital that was later able to participate in the market's eventual recovery.

Today's Portfolio vs. History

Bengen also applied his model to a more recent cohort, starting retirement on July 1, 2000, amid the dot-com bust. So far, this portfolio is tracking ahead of the 1968 group but lags the 1929 retirees, with a current inflation-adjusted value of $69,000. The ultimate outcome for this group remains dependent on market performance and inflation over the coming years.

Reflecting his concerns, Bengen noted his personal portfolio has a more defensive stance against inflation. He holds only 35% in stocks, with 10% in Treasury inflation-protected securities (TIPS) and 6% in gold. "Traditionally, when stocks get this expensive, there are very little prospective returns looking forward," Bengen said.

This article is for informational purposes only and does not constitute investment advice.