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The S&P 500: What If 20 Years Isn’t Long Enough? · Bitesize Retirement

• 0:00
  SPEAKER_00: The S&P 500.
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  SPEAKER_00: What if 20 years isn't long enough?
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  SPEAKER_00: Two people each invest $10,000 in the U.S. stock market.
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  SPEAKER_00: Neither tries to time the market.
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  SPEAKER_00: Neither panics and sells.
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  SPEAKER_00: They simply buy, hold, and wait 10 years.
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  SPEAKER_00: The first person ends up with $56,000.
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  SPEAKER_00: The second?
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  SPEAKER_00: Just $5,500 in purchasing power.
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  SPEAKER_00: Same investment strategy.
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  SPEAKER_00: Same 10-year commitment.
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  SPEAKER_00: One builds a small fortune.
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  SPEAKER_00: The other loses nearly half of their purchasing power.
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  SPEAKER_00: What did the second investor do wrong?
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  SPEAKER_00: Absolutely nothing.
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  SPEAKER_00: The first person invested in 1949.
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  SPEAKER_00: The second invested in 1999.
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  SPEAKER_00: And that's what makes this story so interesting.
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  SPEAKER_00: I came across a MarketWatch article examining nearly 100 years of U.S. stock market history.
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  SPEAKER_00: And the numbers challenge one of the most popular beliefs in investing.
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  SPEAKER_00: If you just hold the S&P 500 long enough, everything will work out.
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  SPEAKER_00: But what exactly does long enough mean?
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  SPEAKER_00: 10 years?
• 0:58
  SPEAKER_00: 20 years?
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  SPEAKER_00: Let's look at what actually happened.
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  SPEAKER_00: Someone who invested $10,000 in 1980 and stayed invested for 20 years ended up
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  SPEAKER_00: with approximately $100,000.
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  SPEAKER_00: That's an extraordinary result.
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  SPEAKER_00: But someone who invested in 1962 and held for the same 20 years earned
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  SPEAKER_00: an inflation-adjusted annual return of just 0.3%.
• 1:25
  SPEAKER_00: 20 years!
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  SPEAKER_00: Think about everything that can happen in 20 years.
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  SPEAKER_00: You change careers, your children grow up, you pay off your mortgage, maybe you even retire.
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  SPEAKER_00: And after all that time, your investments have barely increased your purchasing power.
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  SPEAKER_00: Now here's the question nobody can answer.
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  SPEAKER_00: Are we investing in another 1,980?
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  SPEAKER_00: Or another 1,962?
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  SPEAKER_00: We won't know until years later.
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  SPEAKER_00: And that's why historical average returns can be misleading.
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  SPEAKER_00: The S&P 500 may have delivered attractive long-term average returns,
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  SPEAKER_00: but no individual investor actually receives
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  SPEAKER_00: the historical average every single year.
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  SPEAKER_00: Your results depend heavily on when you invest, and more importantly, when you need the money.
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  SPEAKER_00: Now, let's bring this into retirement.
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  SPEAKER_00: Imagine two couples.
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  SPEAKER_00: Both are 65 years old.
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  SPEAKER_00: Both have $2 million in their 401ks.
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  SPEAKER_00: Both are ready to retire.
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  SPEAKER_00: The first couple plans to keep their retirement savings invested in the stock market
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  SPEAKER_00: and withdraw $80,000 every year to cover living expenses.
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  SPEAKER_00: They figure that if stocks deliver strong long-term returns, everything should work out.
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  SPEAKER_00: The second couple also wants to stay invested in the S&P 500.
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  SPEAKER_00: But before retiring, they make a different decision.
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  SPEAKER_00: They calculate how much income they need for essential expenses,
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  SPEAKER_00: how much Social Security will cover, and how to provide for the remaining gap.
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  SPEAKER_00: They establish a reliable income foundation and keep part
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  SPEAKER_00: of their portfolio invested for long-term growth.
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  SPEAKER_00: Now imagine the next 10 years look something like 1999 through 2009.
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  SPEAKER_00: The market struggles.
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  SPEAKER_00: Returns disappoint.
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  SPEAKER_00: And the first couple still needs that $80,000 every year.
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  SPEAKER_00: Property taxes don't stop.
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  SPEAKER_00: Medicare premiums don't stop.
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  SPEAKER_00: Groceries, utilities, home repairs.
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  SPEAKER_00: None of those expenses care what the S&P 500 is doing.
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  SPEAKER_00: Over 10 years, that's $800,000 in withdrawals before adjusting for inflation.
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  SPEAKER_00: And if the market is down, they may have to sell more shares to raise the same amount of cash.
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  SPEAKER_00: Those shares are gone.
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  SPEAKER_00: Even if the market eventually recovers, the shares they sold won't participate in that recovery.
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  SPEAKER_00: This is called sequence of returns risk.
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  SPEAKER_00: And it's one of the biggest differences between investing for retirement
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  SPEAKER_00: and investing during retirement.
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  SPEAKER_00: What about the second couple?
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  SPEAKER_00: If their essential expenses are already covered by reliable income sources,
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  SPEAKER_00: they may have more flexibility to leave their stock investments alone during
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  SPEAKER_00: a difficult market.
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  SPEAKER_00: They can still experience losses.
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  SPEAKER_00: Their overall financial situation may still be affected.
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  SPEAKER_00: But they're less dependent on selling stocks at exactly the wrong time.
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  SPEAKER_00: Here's the interesting part.
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  SPEAKER_00: Both couples might own the exact same S&P 500 index fund.
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  SPEAKER_00: The difference isn't which stocks they picked.
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  SPEAKER_00: It's how much of their retirement lifestyle And that brings us to a very important distinction.
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  SPEAKER_00: Investing for growth and creating retirement income are two different jobs.
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  SPEAKER_00: The S&P 500 can be an excellent tool for long-term growth.
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  SPEAKER_00: But long-term average returns are not a retirement paycheck.
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  SPEAKER_00: So before you retire, try this simple exercise.
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  SPEAKER_00: Imagine the S&P 500 delivers almost no inflation adjusted growth
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  SPEAKER_00: over your first 10 years of retirement.
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  SPEAKER_00: Not necessarily a crash every year,
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  SPEAKER_00: Just a disappointing decade where your purchasing power barely grows.
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  SPEAKER_00: Could your Social Security
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  SPEAKER_00: and other reliable income sources cover your essential living expenses?
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  SPEAKER_00: If not, how large is the gap?
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  SPEAKER_00: And where would the money come from?
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  SPEAKER_00: Cash reserves?
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  SPEAKER_00: Bonds?
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  SPEAKER_00: A pension?
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  SPEAKER_00: Guaranteed lifetime income?
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  SPEAKER_00: Some combination?
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  SPEAKER_00: The point isn't to eliminate stock market risk.
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  SPEAKER_00: It's to make sure you don't have to depend on favorable stock market returns just
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  SPEAKER_00: to pay your bills.
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  SPEAKER_00: Because you could have $2 million or even $3 million in your 401k and still have
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  SPEAKER_00: an important retirement planning problem to solve.
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  SPEAKER_00: The S&P 500 has helped millions of Americans build wealth.
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  SPEAKER_00: But building wealth and turning wealth into reliable retirement income are not the same thing.
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  SPEAKER_00: So here's the question I'd leave you with.
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  SPEAKER_00: If you were retiring today with $2 million in your 401k and you knew
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  SPEAKER_00: the stock market might deliver almost no real growth for the next 10 years,
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  SPEAKER_00: would you still feel comfortable relying on that portfolio
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  SPEAKER_00: for all your retirement income?