3 min read
A couple weeks ago, I analyzed how a portfolio worth 25 times one’s annual expenses invested entirely in the S&P 500 performed historically. This table summarizes that analysis:
This portfolio not only survived nearly all multi-decade retirement periods, but it dramatically increased in value over the course of most periods. Read the full post for details.
These results were so mind-blowing that I followed it up with another analysis that analyzed how “less than 25 times expenses” portfolios performed over the same time periods. These two tables summarize that analysis:
The difference between the ending median values for the 20x and 25x expenses portfolios wasn’t as large as I thought.
The 15x expenses portfolio performed far better than I thought across all time periods.
The 10x expenses portfolio survived 80% of the 10-year time periods, but did awful on longer time periods.
The 5x expenses portfolio did horrible across all time periods. It’s simply not a large enough portfolio to survive and grow on it’s own without additional contributions.
Read the full post for details on that analysis.
Throwing Post-Retirement Income into the Mix
Both of those analyses assumed that you earned zero dollars in income during retirement. This begs for another analysis that answers the question: How does active income during retirement impact when you can retire and how much you actually need to retire?
Let’s run through the numbers…
Using S&P 500 inflation-adjusted returns from 1928 to 2016, I looked at how different-sized portfolios (5x, 10x, 15x, 20x, and 25x annual expenses) performed over different time horizons (10, 20, 30, 40, 50-year periods) with different levels of active income during retirement for different lengths of time.
Wait, what the hell does that all mean?
I know, that’s a lot of information. Because there are so many variables in this analysis, I created an interactive Excel spreadsheet that shows all the data, the formulas, and the results.
You can download the spreadsheet here.
Here is a quick overview of the spreadsheet. You enter three numbers: your annual spending in retirement, active income in retirement, and how long you plan on earning that active income:
The spreadsheet runs these numbers through all time periods from 1928 through 2016 and spits out two tables.
The first table shows the median ending value of different-sized portfolios across different retirement time periods:
The second table shows the percentage of periods that this portfolio survived various retirement time periods:
Here’s an example along with an explanation.
Suppose I expect to spend $25k each year in retirement. I also expect to earn $15k each year as a freelancer for the first 20 years of retirement before I decide to stop earning active income altogether.
Suppose I want to see how this strategy will work if I only save up 10 times my expenses ($250,000) before I quit my day job and enter retirement. It turns out that the median ending value of this portfolio after 30 years was historically 3.56 times bigger ($890,000) than it’s starting value.
However, this portfolio only survived 87% of all 30-year periods:
The neat part about this spreadsheet is that you can see how the results change when you tweak the inputs. For example, if I instead enter “25” instead of “20” for the number of active income years, the portfolio success rate for 30-year periods jumps up to 93%:
If I also change the active income from $15,000 to $17,000 per year, the success rate jumps up to 100%:
Give it a Try
Download the spreadsheet and play around with the inputs to see how the results change. I should mention that the first five tabs are all data and formulas. If you’re not interested in the math behind it, just ignore those tabs and use the “Results” tab only. If you have any questions, feel free to leave a comment or shoot me an email.
Thanks for reading 🙂
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
Although the bulk of his net worth is invested in index funds, his favorite place to invest in individual stocks is M1 Finance, a site that allows you to build a custom portfolio of stocks for free.
His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.
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