How Are Retirement Plans Affected by Down Markets?

by | May 11, 2022 | Blog, Podcasts

In this weeks podcast, Brendan and Casey discuss how short term market losses impact retirement plans.

They explain how to handle investment account distributions when markets are rocky and the importance of aligning your portfolio with your income needs.

This is a question we’ve been getting a lot lately, so tune in if it’s on your mind as well!

Show Notes

Why Does the Stock Market Go Up Over the Long Term? – Ben Carlson – A Wealth of Common Sense

A Stock is Not an Index – Nick Magguilli – Of Dollars and Data

What’s Going to Bring the Stock Market Back? – Mullooly Asset Podcast

How Are Retirement Plans Affected By Down Markets? – Full Transcript

**Click here for a full downloadable PDF version of this transcript**

Casey Mullooly: Welcome back to the Mullooly Asset podcast. I’m your host, Casey Mullooly here with Brendan this week. Bren, thanks for joining me.

Brendan: Yeah, anytime love it, love doing this. This is what it’s all about.

Casey Mullooly: This is what it’s about.

Brendan: Lets get it going.

Casey Mullooly: We’re back for episode 393, we’re recording this on Monday, May 9th and Bren, this market is sloppy.

Brendan: No, between what’s going on with stocks and bonds and then, inflation stuff, I think that inflation in particular, is weighing on sentiment. And then of course, declining markets never help on top of that.

But, I think last week’s video we talked about, there are some positive things happening in the economy too, with obviously unemployment at some of the lowest levels we’ve seen in decades, job growth, continuing a lot of companies still putting out good earnings.

And so there are good things happening, but, the headliners of what’s happening in the stock and bond market, as well as inflation readings, sentiment seems pretty poor. Yeah. And it kind of is what it is at this point, with the start the year has had.

Casey Mullooly: I know, I think I saw when I did the podcast two weeks ago now, I think I saw that the investor sentiment was the lowest it had been in a decade. The last point it was this low was March of 2009, which is an interesting time in stock market history. That was the lows of the financial crisis. Not saying that, that’s, we’re nowhere near that level right now in terms of market price action, but-

Brendan: I think-

Casey Mullooly: Interesting nonetheless.

Brendan: No, it bears monitoring. I feel like sentiment, whether it’s an official reading or just a general gauge of what you’re hearing from people can be a useful thing to pay attention to, but I kind of look at it as some people talk about valuation in the market.

Not a timing tool, meaning if sentiment is bad, it’s probably a good signal that in general, moving forward, a couple years from here, it will have seemed like a good time to put money to work.

But it doesn’t mean that sentiment’s bad and the market has to turn around immediately and go up. I think that’s something too, that everyone has maybe grown accustomed to in the last couple years, especially the downturn in 2020 when COVID started, six weeks straight down 30%, and then a recovery-

Casey Mullooly: V-shaped recoveries.

Brendan: Pretty just as quick, over the summer months, market doesn’t have to work that way. We obviously have belief that it’s still the best place to allocate dollars to get the kind of returns you need, for whether you’re still building your nest egg or turning to living off of it.

It’s probably the best train you can hitch your wagon to. But, it doesn’t mean that it has to recover as fast as it has in the last couple of years.

Casey Mullooly: Right. Even you look at the last couple of weeks and we’re getting really granular here getting into the last couple of weeks, but we’ve seen some crazy snaps, snap backs. Just last week, we saw Wednesday when the fed announced their decision, the market was up 5% and then the next day it was down almost just as much.

So the market’s moving around a lot and obviously we’re here to talk about it and we’re here to work through things. And one of the things that we wanted to address in this episode is how do down markets or periods of where the market isn’t performing like it has over the last couple of years, how does that affect retirement distribution strategies?

Casey Mullooly: We are here to set peoples, we are here to set our clients expectations and try and frame how people think about taking money out of their accounts in the right way. And I just wanted to share some stats to give some perspective in 2019, the S&P 500 was up 28.5%. In 2020, it was up 15%.

And last year in 2021, it was up 28.8%. That’s 72.3% in three years. This is just the S&P 500. So, unless you have all your money in SPY, then these returns are going to look different to varying degrees, but just hear me out here.

Brendan: Good gauge of in general.

Casey Mullooly: Right. When people say the market, this is generally the S&P 500 is generally what they’re talking about. So 72.3% over three years averages out to 24.1% per year.

Brendan: Pretty good.

Casey Mullooly: Pretty good. We’re about 15% off the highs right now. And if you throw that in there with the 72%, that brings you to 57.3% over four years, which still averages out to 14.3% per year.

Brendan: Still really good.

Casey Mullooly: Still above average.

Brendan: Above historical average for the market, for sure.

Casey Mullooly: Right. One of the things that we’ve been saying a lot is the returns of ’19, ’20 and ’21, it just can’t continue like that. Markets need time to digest and kind of reset people’s expectations. How does that in turn get transferred to maybe a retiree who is drawing down their account?

Brendan: Yeah. When you have a period of high returns like that, you start to think of things a little bit differently because you can grow accustomed to very quickly, only pulling from an ever increasing number in a portfolio, regardless of really, if you were even on the higher end of a distribution rate, as we talk about from time to time with your portfolio.

Over the last three years, on a net basis, you could have pulled twice the 4% rule, let’s say, and still seen your portfolio grow-

Casey Mullooly: Yeah and not even felt it.

Brendan: And it feels like everything is great. The number goes up, you’ve gotten the money out of the accounts that you’ve wanted and needed to spend on, no big deal. But, we know that as you just said, you’re not going to see the kind of growth that we saw over the prior three year period, even if we wanted to throw in the recent decline in the market into it, you’re not going to see that kind of a growth over 10, 20, 30 years, which is the duration of retirements that we’re planning for folks.

Brendan: So you start to grow complacent with the high returns, kind of footing in the bill for whatever sort of spending you desired. And you enter a different regime where even if the market’s not going down, if it’s just range bound and moving sideways for a while, it can feel different. But the reality of it is, is we plan for that stuff, when we build these distribution strategies for folks. But you can plan for it, but the idea of living through it and seeing what that means in comparison to pulling from a portfolio during the good times, that’s a whole nother thing.

Casey Mullooly: Right. When you’re drawing from an account when the market is down, I think the psychological aspect of that is it can be difficult and it can be, if you don’t have that distribution plan, it can be scary to dip into that principle.

Brendan: Or just below some mental threshold, like I think, alluded to earlier, maybe you’re in a year, like 2022 here. Maybe you’re not necessarily tipping into principle, whatever you’ve deemed that as, but your account balance has gone down for five months now, and you’ve been pulling a monthly check for each of those five months too, you feel like you’re layering on by doing so.

Casey Mullooly: Right. So it’s kind of a tight rope that you have to walk, because on the one hand, if you’re drawing it down, that means that you need the money and you’re you’re spending it. So how do we walk people through talking about dipping into their principle or layering on those additional portfolio withdrawals while the account is down? How do we handle that?

Brendan: Well, for starters, it would be great if every single year, we made enough with the investment mix to not have to face that. And I think that some folks maybe have that understanding when they’re thinking about retirement, I think that sometimes pushes people to consider things like dividend stocks or things with high yields, because the idea that whether it’s dividend or an interest payment, is going to throw off enough income to just take that and run with it, without having to touch the principle is enticing. It’s what people want. Obviously, it would be great if it worked that way.

Casey Mullooly: It’s what people want when the markets are down.

Brendan: Yes, of course.

Casey Mullooly: It’s not what people want when the markets are going up.

Brendan: No.

Casey Mullooly: A safe 4 or 5% sounds really good right now, but if you were to say, “Yeah, you’re going to earn 4 or 5%,” to someone even last year in 2021, I don’t know [inaudible 00:09:37].

Brendan: It sounds paltry in comparison to even a balanced portfolio.

Casey Mullooly: Exactly, couldn’t we earn something more than that.

Brendan: Yeah. So I think you need to keep in mind that obviously over the very long term, the whole idea of having money in stocks and bonds, is to not only keep up with inflation and rising costs for things that you’re going to need over retirement, but to also do more above and beyond that.

And if history is to be any guide, then even in a balanced portfolio, I think that you can do that if you can deal with the volatility of the market. But, what you’re not promised is on a month to month, quarter to quarter, or even year to year basis, the portfolio creating what you need as if it’s some sort of perpetual motion machine.

There’s going to be times where you need to pull from the portfolio and your account balance is down and you’re taking your distributions from it.

Brendan: Because as you said, some of the costs you’re pulling for are necessities. There may be some wiggle room, some leeway to take more in good times and less in bad, but, we all have our fixed expenses to some degree. So there’s got to be some minimum threshold to how much variation in income you can tolerate.

And so, when you think of it that way, and you need to create a portfolio that reflects that, I think we’ve talked before about buckets and it’s mental accounting. But having some release valve and something super, super safe and stable to pull from when the market acts like this, is I think, not only a good psychological tool, but it’s just prudent investing, so you don’t end up being a forced seller.

Casey Mullooly: And it kind of allows you to view the portion or the bucket, the long term bucket, in an actual long term capacity.


Casey Mullooly: Meaning that’s where you’re going to own your stocks for growth and you can kind of just account for it in your mind that I don’t need to touch this money.

Brendan: You can put the blinders on and let stocks do what they can. I think you brought to the table a really good chart today, where it has the US stock market from 1928 to last year. And it had the probability of seeing gains over different time horizons. And it has daily at 56% and the chart is labeled-

Casey Mullooly: Basically a coin flip.

Brendan: Yeah. Wall Street plays here, meaning everybody talking on TV on CNBC, Fox Business, Bloomberg, whatever it is, is talking about this, meaning on a day to day basis, the 56% chance that the market will be up versus the reverse of that being down, that’s what everybody is hemming and hawing about on the financial media.

But you move to one year, so on a one year basis, the odds of seeing a positive return improve to 75%, five years improves to 88% and you get to 10 years and you’re north of 95%.

Brendan: And then beyond that is 100%, meaning 20 years, 30 years, 40 years and even people who are well into their retirement now, still have 10, 20 years for their money to last. So at least a portion of their money, is playing there, and that was the point of the chart was Wall Street plays here on the end of daily returns.

We can choose to play on the end of the spectrum, 10, 20, 30, 40 years, where the odds are in our favor. And you can create a portfolio that even if you need to pull in a shorter time horizon than 10, 20, 30, or 40 years, you can construct your portfolio in such a way that you don’t have to play that short term game, that’s much harder to win.

Casey Mullooly: Yeah. I think that we saw some pretty, I would say, reckless investments or investment beliefs crop up over the last two or three years with the meme stocks and all of these alternate, crypto currencies and stuff where everyone just says, “Oh, stocks go up.”

Brendan: We were pulling Scrabble tiles from a bag on YouTube, the Bar Stool Guy.

Casey Mullooly: But I think that people confuse this chart where yes, stocks do go up, when you look out 10, 20, 30, 40 years, you can pretty much take that to the bank. But over the short term, a lot of people are seeing the reverse of that, that stocks do go down and-

Brendan: I think, depending on how you’ve chosen to define stocks and then invest in them, they can go down dramatically and they don’t have to come back, which is one of the things you’re hearing now from folks is this is a good time to dollar cost average. In fact, I think that we had a blog post up recently talking about just that.

And I agree, however, if you dollar cost average into an individual stock, there are no guarantees that an individual stock, like many of them are right now, off 50 plus percent, depending on whether it’s even a big company like a Netflix or a PayPal, or some of these more obscure pandemic companies, like your Zooms of the world-

Casey Mullooly: Teledoc.

Brendan: Yeah, exactly. There’s no guarantees that those sort of companies come back. But I think that if you’re playing in the pond of-

Casey Mullooly: A basket of stocks.

Brendan: Right, a basket of stocks, diversified, market ETFs, like what we use in our portfolios, then, I agree, and I think that the odds we just discussed of 95 plus percent, 10 years, and moving out further of being a positive return, that’s what that applies to, not necessarily individual companies.

Casey Mullooly: Right. I talked about in a recent podcast too, it’s because these indexes like the S&P 500, or NASDAQ, Dow, what have you, it’s because the companies that make up those indices, change over time, based on the rules that the indexes have in place. And Nick Magguilli wrote a great post, which it was basically what we just talked about, the difference between trying to catch a falling knife, so to speak, in an individual stock, versus trying to do the same in an index.

And it’s very different, and I think that that point is really important for investors to understand. And the chart that we are referencing about the stock market gain probabilities is from Ben Carlson, which we’ll link to in the show notes. But I pulled out another blurb from that post about, you hear the stock market goes up over the long term, but why? And Ben had a great explanation for that in the post.

Brendan: I think, just to interject before, and I think we got away from the why over the last year or two, the why didn’t matter anymore, or a lot of people were getting into investing and not considering the why. And just seeing that a number on a screen was going up every single day, seemingly, and that they needed to be a part of that.

Casey Mullooly: And that’s the difference between investing and speculating, of course, because-

Brendan: Agree.

Casey Mullooly: What you’re referencing is speculating. I’m buying this because I think I can sell it to someone higher down the road, basically. And that’s speculating. That’s based on nothing. But investing which Ben talks about here, is based on the actual underlying companies.

So I’m just going to read the blurb because I think it’s great and it’s very important to hear. “In 1928, earnings per share for the S&P 500, was $1.11, while corporations paid out 78 cents per share in dividends. It was impossible to do so at the time, but if you could have owned an index fund, those would’ve been your per share cash flows at the time.

By the end of 2021, the earnings per share for S&P 500 companies was $197.87, and the dividend was $60.40. This means over the past 94 years, earnings on the US stock market have grown at an annual rate of 6%, while dividends have grown 5% per year.”

Brendan: That is what you are choosing to be a part of when you invest in the market, that kind of growth. And of course, over a period of time from 1928 through the present, everything that’s lumped into there, you’ve got how many recessions, how many…

You have not only the 2007, 2008 market downturn, but, the Great Recession, but you have the Great Depression in these stats too, as well as inflation in the seventies and the 1987 crash and bubble and all of these are baked into there.

And you need to plan your portfolio, especially as somebody in retirement, in such a way that you can, obviously you can survive those periods of time. I’m not trying to trivialize them, they happen and they’re scary and you need to be able to survive them without blowing yourself up.

Brendan: But at the same time, you need to get through those as an investor to get the returns that we’re talking about here, which are one of the only things out there that’s going to give you the tailwind you need to fund a retirement. It’s very difficult to say that somebody could be in a position where they have enough saved in cash to, on an inflation adjusted basis, fully fund their retirement.

Of course, we could never answer that without knowing somebody’s exact life expectancy anyway. But even if we made some assumptions, sort of people who are in that position, I don’t know how many of them are out there who could fund the retirement sands at any growth whatsoever. It’s just not feasible for us, so we need to have this kind of growth to some degree.

Casey Mullooly: Yeah. I think this period in time is really making the trade offs of investing really just stand out because we’re talking about stocks, the stock market is not off to a great start this year. On the other side, we’re talking about if you were to hold cash, inflation running at 7, 8%, we’re not sure if that’s going to continue or not, but-

Brendan: I think you’re making a very-

Casey Mullooly: You have to choose which risk you want to take.

Brendan: Yeah, I think you’re making a very low probability bet if you’re taking the last five months as an indication that cash is your best inflation hedge, because there’s no argument that for five months now this year, cash has been the best inflation hedge because even after losing 7 or 8% to inflation, it’s probably ahead of on a real basis, the losses that you’ve seen from bonds or stocks with inflation layer upon them.

You look historically, and I don’t think that you can take the last five months as what will be the best moving forward for the next five months or especially for the next five years or beyond that. I think that you’re still positioning yourself correctly, holding enough cash or equivalent of course, to get through the immediate future, meaning the next couple of years, but then having things outside of that time horizon align to some bonds, which have experienced losses this year and some stocks, which are also down this year.

Brendan: I think those are temporary things that are not going to be the new normal for years and years to come. It’s just something that you have to temporarily deal with as an investor. It’s happened before. It will happen again in the future. And that’s like we were talking about before, that’s how I think you can back into thinking that way, knowing what your needs are. You can put together a portfolio that lets you get through periods of time like this. You don’t have to be happy about it, but you have to live through it and not put yourself in a position to bail out of investments at a bad time.

Casey Mullooly: Right. I think that’s really well said. And I think that is a good place to wrap up this episode. As always, when it comes to investing, you got to balance out what have you done for me lately versus what have you done for me over the long term and invest accordingly. So Bren, thanks for joining me on this episode of the Mullooly Asset Podcast. And thank you, our listeners, for tuning in, we’ll be back with you next week for episode 394.

Casey Mullooly: Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests, are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions insecurities discussed in this podcast.