The S&P 500 calculator is on the previous page, and its calculations include past fund survivability of withdrawals. My interest was about how appropriate is the 4% Rule for a 100% stock fund like the S&P 500? (as opposed to a balanced fund with bonds?) This page is the general introductory info describing the 4% Rule, the S&P 500, the general market, bonds, dividends, gain, Bear markets, etc. This is some market stuff that you should know. You might find a few things of interest.
This page was to be the introduction to that same S&P 500 calculator, but it was too large to include there. A Menu to several of its subjects below is:
A menu into this page is:
The 4% Rule
The 4% Rule was considered a safe retirement withdrawal rate, originally about balanced funds, meaning stocks balanced with bonds, typically containing 60% stocks and 40% bonds (but there are also other mixes). In the past, the idea was that bonds would also provide some earnings when the market is down. A balanced fund (with bond income) should drop less than a 100% stock fund during a market crash, but it also earns less in the good times (and there are many more good times than bad). The 4% withdrawal rate has been promoted as safe, determined by testing past market history with 4% withdrawals lasting through 30 years of withdrawals in retirement from any starting date. However concerns are that it did not specify any specific fund investments, nor any value of continuing fund growth, but which seems major factors to me. And the 4% guess came from history when bonds paid more than now, but 2022 has to be the worst year for balanced funds, because both stocks and bonds were down big. But if waiting until the fund grew to $1 Million dollars, then even if 5% withdrawal every year is $50K a year, which would last 20 years if it never made another dime. But a usual gain is 10%, which leaves plenty for a longer time frame, and/or for higher living, and/or for leaving inheritance. So clearly, the key is to realize retirement time will come, and most income will stop, so start investing early so the fund has 30 years to grow to $1 Million first.
Note again: 4% withdrawal does NOT mean from Day One. It means waiting to start withdrawals until retirement, after building with many years of gain. Then it also means recomputing the 4% withdrawal every year, 4% of the then current fund value. In bad times, a continuous fixed dollar withdrawal can be devastating for a relatively small fund.
But instead of balanced funds, the point here is that I also wondered about 100% stocks (like the S&P 500 Index funds for example). Any X% percentage withdrawal rate might seem safe if the fund average earning gain was X% to support it, except years vary in gains, at an irregular rate. A 50% loss (say $100 down to $50) requires a 100% gain to recover, which might take a few years (see calculator 4). The bonds in balanced funds used to add income to aid that, but times change, and with interest rates increasing now, resale of bonds is also losing money now (see Bonds). . The 4% concept specifically means the withdrawal dollars are adjusted each year to not exceed withdrawing more than 4% of the then current fund. And market years do vary erratically, when a couple or three seriously bad years in a row can make a serious departure from the average. So the rule examines market history verifying survival of all starting dates enduring all known bad year periods. This sites S&P 500 calculator (link at top above) has the Test that does the same thing, with variable withdrawal rates. The future is unknown of course, but knowing the history should help know what possibilities could happen (the 2000 decade was particularly poor).
Origin of the 4% Rule: Interest rates of bonds were higher in older years, and the purpose of a balanced fund (Balanced meaning equities mixed with some degree of bonds, often 40% composed of bonds called 60/40 stocks/bonds) was market safety, because bonds are not affected by the market, and the bonds contributed to help tide it over in bad market times.
A description of the 4% Rule is that it comes from a 1994 investigation of historical market data that tested for a safe and sustainable withdrawal amount, specifically for a balanced fund. Its conclusion was that a 4% withdrawal would survive 30 years of retirement withdrawals in past situations if invested anytime since 1928. However, it was done earlier than the worst times in the 2000s. Bonds are a different situation. The bonds did provide some income in those days for a degree of safety in bear markets. Here's a chart of the Federal Reserve Bank's interest rate history.
A good recent article about the 4% withdrawal number is at Morningstar.
IMO, a downside of the 4% Rule is that it does not consider the gain of any specific fund, nor how much money it has accumulated before withdrawal begins. These seem serious factors in predicting how long the fund can survive the withdrawals. With the huge assumption of zero additional future gain or loss, then 4% of the beginning value would imply 25 years, but still, if the 4% were properly recalculated each year, the withdrawals would diminish, but then 1/3 would be left after 25 years. And of course, another consideration is that 4% is larger from a large fund than from a small fund. So start early and let it grow.
What are S&P 500 Index funds?
There are many S&P 500 Index funds which as a group, are widely considered to be one of the wisest market investment choices for most people (those who are not market professionals following the market closely every minute). These Index funds keep their S&P 500 holdings exactly matched with the index it is tracking, to match the same performance. The S&P 500 Index is the collection of the 500 largest publicly-held companies in US stock exchanges (the largest large-cap stocks, including both growth and value stocks), all well established, and widely including most industry types. Might say it's where the money is, since the S&P 500 includes about 80% of the total available (public) market capitalization.
Capitalization is a companies total dollar market equity value, equal to the companies number of public stock shares × current price per share (weighted as each dollar instead of each company). The S&P 500 index is weighted by capitalization, including the total public stock amounts, so that the largest companies count proportionally more in the index, according to their overall capitalization dollar value.
The many S&P 500 Index funds try to exactly match the S&P 500 Index performance, but these funds do have different expense fees (and the lower fees leave more for you to keep each year).
There are actually 503 tickers in the S&P 500 (today, but it has varied), because three of the companies have two major classes of public common stock included (Google, Fox Corp and Discovery Communication). Google's company name is Alphabet, with two public stock classes A and C, with two tickers GOOG and GOOGL, which two tickers are weighted individually, but I add them together in the table here. The S&P 500 rules today exclude companies with more than one class of public stock, but these three are grandfathered.
S&P 500 Weighting
Top 10 as of 9 Dec 2023 |
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| Apple | AAPL | 7.40%
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| Microsoft | MSFT | 7.14%
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Alphabet (Google)
Class A & C | GOOG
GOOGL | 3.92%
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| Amazon | AMZN | 3.46%
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| Nvidia | NVDA | 2.98%
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| Meta (Facebook) | META | 1.88%
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| Berkshire Class B | BRK.B | 1.67%
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| Tesla | TSLA | 1.74%
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| United Health | UNH | 1.32%
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| Eli Lilly | LLY | 1.22%
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S&P 500 Weightings
as a percentage of the S&P 500 Index are as shown by their top 10 here. The Apple plus Microsoft stock total is approximately 14% of the S&P 500 Index value. The top five companies (1% of 500) are Trillion dollar companies, with combined weightings that often comprise around 23% of the S&P 500 index. The argument is company values are not equal, so the S&P 500 is weighted by capitalization (total dollar value of each company's public stock). So as weighted, the current smallest company in the S&P 500 list is currently at about 0.006% weighting, but which is still among the 500 largest companies.
The weighting method is that Apple's capitalization is several hundred times more dollars than the smallest member company (Each of Apple's and Microsoft's worths are about $3 Trillion, so each is about 7% of the total S&P 500 capitalization), so the weighting is per each invested dollar instead of per company. Some fault the weighting method because a few companies do dominate the total, but that is where the money is. The S&P 500 is near 80% of the total U.S. market capitalization. The weighting numbers vary with the daily prices, computed each trading day (to compute the S&P 500 Index). All of the 500 "Weights" add to 100, so these numbers are the actual percentages of the total Index value.
See the current weighting of all of the S&P 500 companies. All the numbers change slightly every market day.
To be eligible for S&P 500 inclusion today, each company must have publicly held stock (but with ONLY one public stock class), and the smallest of the 500 is currently about $13 Billion capitalization. However each company added must also be selected by a S&P committee with additional performance concerns. Companies can also be similarly removed from the S&P 500. One must be removed for every company added. Some are removed when purchased by another company, or when their value becomes less than another company that can be added. These S&P 500 are the Big Boys, the largest and most financially successful. Then all of the S&P 500 index funds simply plan to exactly track and match the performance of the S&P 500 index (less the fund's expense fee).
Probably about any question you might have about the S&P 500 Index would be answered at S&P U.S. Indices Methodology.
There is also the Total Stock Market Index Fund (Vanguard VTSAX) with stock of 3992 companies (a blend of selected large-cap, mid-cap, and small-cap U.S. companies). To me, it seems mostly a conceptual idea, because while it includes many smaller companies, it is also weighted by capitalization like the S&P 500, which boils down to be that most of the value is at the top of the list, with the smaller stocks weighted much less strongly, with much smaller contributions to the Index. It has very similar performance as the S&P 500 Index (usually a gain rate within a percent or so from the S&P 500 Index in individual years).
The Dow Jones Index is the major index normally reported by the news media.
The Dow Jones index represents 30 US stocks (all are in the S&P 500). It is share Price weighted (NOT equally weighted), meaning the stock with the highest share price affects the index the most (regardless of total capitalization). It is adjusted for stock splits, but still mysterious. For example, United Health is currently number 1 weighted (as 10.4% weighting in the Dow Jones Index, but only 1.4% in the S&P 500 Index), ahead of Apple and Microsoft (#12 and #2 in Dow Jones, which have split their share price several times, which reduces their effect in this index). So I see the Dow Jones as an out-of-date system. United Health has 0.6% of Apple's capitalization, but is weighted 3x more in the Dow Jones. (See a Dow Jones list of stock changes and a list of Dow Jones Weightings).
The S&P 500 Index represents the 503 largest public stocks. It is capitalized weighted, meaning a $1 price change in a $1 Trillion company has ten times the effect in the Index as a $1 change in a $100 Billion company. Many consider the S&P 500 Index to be most representative of the overall market performance. I agree, based on the notion that owning stock represents owning part of the companies gains. Again, the S&P 500 is near 80% of the total U.S. market capitalization. The S&P 500 Index is diversified and has been a good investment bet long term).
There also are various S&P Equally Weighted funds, either for all of the S&P 500 or just including specific industries or concerns, but equally weighted, for example ticker RSP. It seems to have a slight advantage in bad times (when the large growth stocks are well down), but overall, my notion is that the S&P 500 Index usually beats it.
The Nasdaq Index (Nasdaq Composite) is 3454 stocks (all types, including some of the largest companies). The Nasdaq is heavily weighted, with the largest having near 2x the weighting percentage as in the S&P 500 (The companies in the New York stock exchange are not in the Nasdaq exchange, but many others are). The Nasdaq Composite Index are not the small companies, the Index requires a capitalization of at least $550 Million. There is also a Nasdaq 100 index composed of the 100 largest companies in Nasdaq.
The calculator here for Performance Comparison of over 100 stocks and funds lets you also easily add your own stock choices with a simple Copy/Paste from the Morningstar Total Return % statistics. Be aware that the highest performing growth stocks often suffer the worst in bear market lows.
A few important facts to know about Dividends
(stock and funds, including bond funds,
but excluding directly held bonds)
It is important to realize that a stock dividend payment is a withdrawal which equally reduces the stock price (dollars per share), and thus also the investment value and its future earnings. A stock dividend payment is simply a withdrawal, a distribution of the earnings you already had, so it is absolutely NOT new gain. However reinvesting the dividend retains the investment value, and has very tangible benefit. The reinvested dividend (typically every quarter) becomes free additional shares earning greater future earnings.
A company's publicly held capitalized value is their number of existing stock shares multiplied by one share's price value. Both Apple and Microsoft values this way computes to be near $3 Trillion. The idea of the dividend is to distribute some of the company profit to the stock owners. The dividend money paid out (as a few dollars per share) was removed from the company's value, as a payment to you. This reduces the company's value by millions, so the stock price (which reflects the remaining value of the company) is automatically and equally reduced by the same dollars per share when the dividend is paid. The price drops, but there is no loss, because you will have the dividend cash in hand (in your brokerage account). Yes, your investment value is reduced, but due to that corresponding stock price drop, your value of the paid dividend and your stock's remaining value remains exactly the same sum value as before the dividend, i.e., there is no gain on that day. Yes, the stock price did drop, and the company value and your investment did dropp, but you did not lose anything because you have the cash withdrawn. — You already owned that stock that is subtracting the dividend. It dropped in price, but you do also have that cash difference now. There is no gain and no loss, not from the dividend on that day. The distribution was just from the company's stock value that you already owned before, but now is instead transferred from your investment to your cash. Then if you keep that dividend, it is a withdrawal from your fund value, and its value goes down equally. But if you reinvest it (putting it back into the investment), your stock or fund value stays the same as the previous value (no gain, no loss), but it does acquire more shares (free shares too, from the dividend reinvestment) for future earnings.
| If a stock with price $100 distributes a Dividend of $1 per share
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| If Dividend is Withdrawn | If Dividend is Reinvested
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| Stock price is equally reduced to $99. You do have the $1 per share dividend in your pocket, so it's the same value in that way on that day, but it is a withdrawal reducing the investment for less future earning. This is a serious continual withdrawal every quarter, which is extremely counterproductive to future gains.
| Stock price is now $99, but the price drop is offset by the added reinvested shares, so you still retain the same previous value, also the reinvested dividend is additional free shares each quarter (at no additional cost) for years of much greater future long term earnings and compounding.
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| Long term, this reinvested compounding becomes a Big Deal
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The term "reinvested" says it all. This payment was already invested before the dividend payment withdrew it. You could now spend it, or invest it elsewhere, but "reinvested" typically means put it back into the investment. The stock dividend is NOT new gain, it is simply a withdrawal from your investment and future earnings. See evidence this is true.
If it might help to encourage your dividend reinvestment, think of it as dollar cost averaging, which it of course is, and is a good plan. But it also retains your investment value, and adds additional Free Shares
Rationale of the new reinvested shares being "Free": Sure, you do buy the new shares with the dividend withdrawn from your earnings, but its still your same money. It came out of your investment, and reinvestment puts it back into your investment. You could keep it out if you wish, but reinvestment puts it back to restore the same previous investment value, and also adds new free shares with zero additional cost (every quarter). So either way, the overall value is unchanged (on that first day), because it already was and still is your money, but your investment future potential is lowered if withdrawn, but will increase if reinvested (seriously increased over long term). The share price did drop by the dividend amount, but reinvestment puts it back in the form of additional shares to be the same value again. This example of a 1% dividend reinvested now buys 1% more shares at a 99% price. Then on that day, the investment is exactly the same value as before (101% shares at 99% cost). You do now have 1% more free shares (free meaning for zero additional cost). This is repeated every quarter (120 quarters in 30 years), and after several years, this adds to a dramatic increase in earnings. And the longer time of years continues that increase, exponentially.
Tax: The US IRS does tax your dividend as "income", if reinvested or not, because the act of returning it to you made it be "realized income" (that you already had earned previously, but just not withdrawn it yet into your pocket). Tax is due on any withdrawal, reinvested or not. But if reinvested, that purchase increases your cost basis so you won't pay tax on that part again later.
Note also that if your fund sells a stock they held, that becomes realized too, so they must report their profit or loss in your dividends 1099 form, so it affects your tax owed. Nothing about a dividend is your choice, except if you will reinvest it to retain your full investment, or will keep the withdrawal. The 1099 will report the amounts that are Short Term or Qualified Long Term. A dividend does increase your Cost Basis, so you won't pay this tax again.
This section is NOT about Directly Held Bonds, those dividends are in fact simple interest, which is a different concept. But it is all the same if the dividend is from a "company stock" or from a "fund" (including bond funds). A funds income is the dividend received from the company's stock or bonds they hold. The fund distributes that collection of dividends as fund dividend, and the fund price drops in the same way. The dividend is NOT new income, but is just a withdrawal from previous income you already held. Dividends from directly held bonds are a different thing, but bond funds or stocks are the same as said here. See more detail about Dividends here.
The most profitable thing to do is to reinvest every dividend, which retains today's investment value, and adds a few more free shares each time (at no additional cost), which makes a huge difference long term. You already owned the dividend money, so it was just a withdrawal, NOT new income. If you pocket it, the withdrawal simply reduces your investment and its future earnings. But you can put it back by reinvesting it, in the form of additional free shares to produce more future earnings. This is the only advantage of dividends (but it sure is a big one). A stock paying 2% dividend a year is (only if reinvested) contributing 2% more free shares every year (at no cost), which drastically increases your long term earnings. It really adds up over the years.
Withdrawing Dividends is Very Costly Long Term
- The market results are different numbers every time, but to provide a general case, this is a hypothetical example of an investment that earns a Fixed 10% every year. The importance is that reinvestment compounding is exponential with the years. If no dividend, the standard Fixed 10% earnings formula is:
1.1010 years = 2.59x value at 10 years.
1.1020 years = 6.73x value at 20 years.
1.1030 years = 17.45x value at 30 years.
1.1040 years = 45.26x value at 40 years.
The point is, the years do the compounding work, and exponential is dramatic, so start early. (see Compounding and Annualized Return and calculators).
- If a 2% dividend every year is also reinvested (which effect is the example's 10% gain plus 2% more shares) for 30 years:
1.1230 years = 29.96x value (nearly doubled by reinvesting the 2% dividend)
Dividends are typically paid each quarter, and this formula compounds annually, but still the same idea.
The reinvested 2% dividend increased earnings by (29.96 - 17.45) / 17.45 = 0.717 = 71.7% more gain in 30 years long term (more than if no dividend to reinvest, and certainly more than withdrawing the 2% every quarter). Reinvesting the dividend back in has huge long term gain, because it keeps adding new free shares for the future. But on the day it is paid, the dividend is NOT new income, it is simply a withdrawal of previous gains you had already earned (withdrawal makes it be taxable "realized income"). The dividend withdrawal lowers the existing stock price by the same dollar amount, which lowers the invested value the same way. But you do have the dividend cash now, so in that way, your overall value on that day remains the same, but no longer invested the same way, reducing future gains.
- If the plan instead withdraws a 2% dividend every year, the example's remaining (10% - 2%) = 8% increase grows this way for 30 years:
1.0830 years = 10.06x (substantially less, nearing one half)
You do also have the withdrawn 2%, but that is very minor, and it reduces future 2% withdrawals.
1.0230 years = 1.81x
Plus all the accumulated 2% dividends withdrawn are 0.02 × 30 years = 0.6x cash, then totaling 10.66x value, still substantially less. The dividend withdrawals keep reducing the investment.
You might reinvest the dividend somewhere else so it compounds, but this example assumes you simply spent it as received. It's just a small amount each quarter so it may seem trivial, but I'm here to tell you that it eventually adds up in a very huge degree. In 30 years:
The 10.66x value is (10.66 - 17.45) / 17.45 = -0.389x or -38.9% less gain than if there were no dividend.
And (10.66 - 29.96) - 29.96 = -0.644 or -64.4% less earnings than if reinvestment.
I think the appropriate saying could be "Wake up, and smell the roses". 😊
And great exception is of course made for withdrawals starting during retirement, which is generally the purpose of providing the investment. But it is the waiting until retirement that provides the years of growth to amount to something then.
The dividend is NOT new income, but is just a withdrawal of prior earnings, but the continual withdrawals just keep on reducing the investment. But the reinvested dividend is a continual stream of additional free shares, which do earn considerably more, long term.
In other words, for a long term investment that offers dividends, ignoring dividend reinvestment seems an extremely costly and counterproductive plan.
How You CAN Reinvest Stock Dividends
If possibly your broker's site does not show any obvious way to reinvest stock dividends, that answer is here.
If the dividend was $1.60 per share, and you had 100 shares, then that dividend is $160. That money removed drops the share price by the same $1.60 per share, but the investment value is equally compensated if the dividend is put back (reinvested). That restores the previous value, but there is no gain (yet). If the stock price is $60 per share, $160 reinvested would buy 2.6667 more shares, which are free shares (i.e., dividends are paid from your previous earnings, so reinvestment just puts it back, so no additional cost). The free extra shares is a benefit, not yet today, but for greater future gains. Repeated each quarter, it becomes a lot of free shares. Mutual funds easily handle reinvestment of such fractional shares, but individual stocks do not. Stock exchanges work with whole shares, and strongly prefer lots in multiples of 100 shares. They have no option to trade fractional shares.
However, there is usually a way, at least for popular stocks. Many brokers now do offer a stock dividend reinvest option. They do this by automatically putting your reinvested dividend amount into a mini-fund containing only that one specific stock. It is commonly commission-free. You don't see that brokerage mini-fund directly, but your stock account shows the 102.6667 shares the first time, and repeats grow the shares each quarter. When you do sell it, the broker will do the two transactions, and it works out, as expected. And you may get two dividend payments from the two accounts. Reinvesting duration over only a year or two won't be a large difference, but long term, like 30 years, it will be awesome. So yes, stocks can have the option to immediately reinvest dividends. For example, here is Vanguard's description offering reinvesting stock dividends. They and others do offer dividend reinvestment of stocks, and may be already automatically included for an IRA or Roth account. Reinvesting all dividends will increase your compounded long term growth.
If you don't see an obvious method there to reinvest your stock dividends, ask your broker how to do it.
Stock Dividends are valuable, but are NOT new income, so withdrawing them is simply a withdrawal from your investment (which is a strong detriment to future gain). Reinvesting them is more new shares at no cost. The very strong gain of dividends is the long term compounding of the additional shares added by reinvesting dividends. Near 80% of the S&P 500 companies pay dividends in some degree. Dividends are dollars per share, percentage is annual, and is typically paid each quarter. See a list of those companies in the S&P 500 ranked by dividend. The S&P 500 dividend itself is the dividend paid by all 500 companies (but about 20% of those don't pay dividends. Many growth companies instead invest profit into creating more growth.)
Reinvesting dividends is a very major part of long term earnings. Long term, the cost of withdrawing dividends is too high to consider, much more than you might ever imagine (costing about half of the total gain potential over 40 years).
My computed chart on the previous page shows a typical cost of withdrawn dividends from a S&P 500 Index fund over the many long term years (due to seriously reduced compounded earnings then).
Continuing General Market Details
There are about 65 stocks referred to as Aristocrat Stocks, which to be included in their list, the companies must be in the S&P 500 (largest companies), and must have increased their dividend every year for 25 years, a point of pride indicating a stable business. See that Aristocrat Stocks list. Their annual increases can be very small, and about half of them still pay less than 2.5% dividends, and some pay less than 1%. A favorite of Warren Buffet at Berkshire Hathaway is Coca Cola (KO) paying about 3% plus normally decent earnings. Whereas most of the best growth stocks pay no dividends, and also can have risks and prices that vary widely, but often pay greater earnings.
If interested in a high dividend fund, you should also know the stock's Total Return (price gains plus dividends). One way to see it is putting its Morningstar 10 year Total Return % data into the 3rd calculator on another page. And the 10 year history of the 60+ largest S&P 500 stocks (and several others) is shown here.
Indexed funds vs. Actively Managed funds: Index funds simply try to match performance of the fund to the actual daily index of the group of companies by using computers to maintain the index match by automatically buying the matching shares of each company (passive investing, computers instead of managers, low fee cost). Whereas actively managed funds instead have a human manager trying to pick the selected best paying investments (at larger fee cost). And managers might accomplish that now and then, but next year may be rather different, and it is commonly said that indexed S&P 500 earnings beat managers about 90% of the time (the lower fee is some part of it).
Another category is ETF funds (Exchange Traded Funds), relatively new. Standard mutual funds can only be traded after the market closes, for the close price, and then Only if ordered before the market closes. ETF funds are traded like stocks, any time the market is open, at the market price. That could be important if you trade frequently, but won't be important if you buy and hold. One example is the Invesco NASDAQ 100 ETF, ticker QQQ, which is 100 of the leading S&P 500 stocks.
Fees: Brokers typically charge commissions on buying or selling stocks, however some brokers now are free or almost so. Market exchanges have a slight difference between buy and sell prices of stocks (bid and ask), which is a fee on the buyer. Some brokers sell only funds with a "sales load" commission which has been quite high, however there are also very many no-load funds with no charge (you must look those up yourself). Those are one time charges. However, funds also have annual fees, charged every year for the management, so while maybe a fee may sound low, it can add up big every year. Some fees are near zero on Index funds. The large brokers with no commission will handle your trade, probably only online, but don't expect advice on what to buy. Those earning commission may offer more advice, but they might be more interested in their commission (they have lists of what to sell today). You'd be advised to shop around a bit to be aware about the fees and commissions. It's your choice and there are good choices, and less fee is more final profit for you. Morningstar Total Return results do include annual fund expense fees, but do not include any commissions or sales charges.
Many consider the S&P 500 Index to be most representative of the overall market performance. It is typically a very low fee, and it is diversified and a good bet long term. Be aware there is a market saying that trying to pick a stock and to time the market is a fools bet. Meaning, stock futures can change, and it is simply not possible to time the market (accurately). You might see Warren Buffet's $1 Million Bet with the Hedge Funds.
But yes, there are other funds and stocks that sometimes earn more than the S&P 500 Index. The largest of those companies are probably in the S&P 500, contributing their share, and the S&P 500 is 500 stocks. However the largest companies are heavily weighted, so it is not very diversified. The "Magnificent Seven" of them (Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta Platforms, and Tesla) account for about 27% of the S&P 500 results (but 7/503 = 1.4% by count). The hot stock downside is these currently hot stocks are more volatile, their prices can swing widely, particularly the big tech growth stocks, which is great when the market is good, but the risk is the worst when the market crashes. And it does seem that the faster they grow, the faster they can fall. The leading stocks can fall the most. The past year 2022 was a pretty bad year, the S&P 500 bottom was -25%, but -18% to -20% was more common most of the year. The biggest usual leaders (like Apple, Microsoft, Google, Amazon, Nvidia, Tesla) just saw way down values from -30% to 40%, and a few cases like Facebook and Netflix were down 50% or 60% (for an awakening, see Performance Comparison of Total Returns of 100+ stocks). But the good stocks always recover, eventually, and 2023 is starting out much better, not quite full recovery yet, but much better (and these growth leaders are leading it). The market is usually good overall, but there certainly can be big downside surprises. If investing in individual stocks, you may want to watch closely, and know when and why to switch stocks (preferably before it changes, but that is extremely difficult to know, it happens before we know about it). The S&P 500 can be more comfortable long term without close watching, but it does go negative with the market, like this year. It has always recovered to continues growing, but that is not very comforting while waiting in the bad times.
Diversification: Don't put all your eggs in one basket. The S&P 500 mix of 500 companies is a diversification in the various industries (tech, energy, financial, consumer, health, industrial, materials, etc). However all of the 500 are large cap stocks (successfully grown very large, but which includes No small caps, mid caps, emerging markets, foreign markets, bonds, etc.).
A S&P 500 Index fund earns more than balanced funds ("balanced" means majorly mixed with bonds for diversification), but bonds can be very volatile too, because bond value varies with interest rates, which goes up and down too (see Bond Duration on the Bond page). But overall, the S&P 500 trend line is quite appealing. The nature of investing is that some risk is necessary to earn higher gains, a low risk investment doesn't earn much. The S&P 500 does have the normal daily market ups and downs, including the rare economy crashes, but the overall S&P 500 averaged gain has historically always been of about 10% a year, compounded long term. Which is NOT a guarantee — years vary, a few years are negative, but there are many more good years than not. However a bad crash with a few bad years in a row will have a large effect. The entire 2000 decade was down -9.4% with 2001 and 2008 crashes that were pretty bad. But the long term picture is very appealing, with only a few dips, which have always recovered of course.
Nothing ventured, nothing gained. Ben Franklin said that too, but the thought is centuries older (buy low, sell high). Some people do fear anything in the market is too much risk for them (yes, the market can crash in bad times, but then it always has recovered, after a while). At least it does if it was a good investment, and the S&P 500 are the largest and most successful Blue Chip companies, which is a good strong bet.
The overall years can hide a few adjacent down years during which withdrawals could deplete the fund. The S&P 500 will recover, it always has, but if all your money was depleted earlier due to withdrawals, it ends there. The first early years are the higher risk of withdrawals, when value is small before it has earned much, since more money will of course always last longer in a crisis. So first building more money in the fund (before the retirement withdrawals) is the insurance to last longer when down, and to make recovery easier. Reason would suggest that first allowing maybe 20 or better 40 years for the fund to build and grow without any withdrawals would make all the difference of survivability, and would of course also provide much greater income during retirement. The market years do vary erratically, but continually withdrawing 10% also with average earnings near 10% might (on average) usually keep it drained down to always about the same level, more or less. It can't grow more then, but its value won't vary so greatly through a long retirement. Except there are variations outside of average, and limiting withdrawals to about half of the average fund earnings rate significantly improves odds against going the fund going bust (and would also leave something for future inheritance to your heirs).
Never withdrawing anything will not go to zero, also unlikely if withdrawal is a small percentage, but fixed withdrawals can become relatively huge when the fund is small, so recompute the withdrawal percentage every year. Fixed dollar withdrawal can become very large when the stock value drops. Even an extremely bad rare crash probably leaves at least 50%, which is certainly no fun then, but it has in fact always recovered. Here is a table of a few years of S&P 500 record highs. But when and if it is down low, but then percentage withdrawals become fewer dollars of withdrawals when the fund is low. Instead, the biggest danger is fixed dollar value withdrawals, which if blind to current situations and not limited to a reasonable current percentage,
of which an example is shown in the Test section on previous calculator page. Your planning for that should have occurred decades earlier. Withdrawals are the desired and necessary goal in retirement, but are very counterproductive during the growth phase. In every case, withdrawals should be reconsidered if the fund value gets low. We don't know the future but we can look at the effect of "typical" past periods, regarding our withdrawal feasibility.
One issue of a 4% Rule is that it does not specify any specific fund type or contents, nor any specific fund value. However a fund containing more money can obviously survive withdrawing in a crash longer than would the same fund with less money. Meaning, a large million dollar fund and a small $10K fund both withdrawing after a bad crash might both fall to 50%, but 50% of a $Million is much more survivable (and with greater gains in recovery) than 50% of $10K. The survivability of investing for 20 or 30 years to build before starting withdrawals is a big factor of retirement withdrawal success.
The survivability of a reasonable percentage withdrawal not hitting zero seems relatively independent of value — only meaning a fixed withdrawal percentage rate (if the withdrawal dollars are readjusted every year to hold that percentage rate), it withdraws much less when fund is low, near zero withdrawal when near zero value, and worst case still always leaves some value instead of zero. Maybe only a few cents left, but not exactly zero, so hitting zero can take a very long time. Which is the reason an adjustable $100 minimum limit was added to the S&P calculator to more clearly define the end of Survival due to depletion. Possibly this minimum to define depletion should be higher for a stronger recovery, and you can change it. Whereas a fixed amount withdrawal just keeps on coming, whether the fund is low or not. But in the real world of fixed withdrawals in dollars, hitting zero is certainly about the fund value, since a higher value fund will always last longer through any crisis. The important thing is to maintain a fund value that can recover and survive. Continuous fixed-amount withdrawals make remaining Fund Value be a very major survivability risk (and many years/decades of growth with no withdrawals until retirement is the obvious way to easily increase retirement fund value). If you had $1 Million in a fund, a bad crash might drop to 50%, but half a million would still last a very long time, and then the larger value will also recover with more dramatic gains than a tiny value could.
Inflation has historically averaged about 3%, and after being 1.2% in 2020, now inflation in 2022 is high but is down some, 9.1% for June 2022, and is currently at 3.0% (for June 2023), so the times have become very different. But the S&P 500 Total Returns (includes reinvested dividends) has averaged 11.77% gain for the last 50 years (including the 13 negative years during that period).
Since generally low earnings from bonds is less appealing, my interest was about something like the 4% Rule, but for 100% stocks, such as the very popular S&P 500 index funds. A good stock fund earns a lot when the market is good, but market value can drop significantly when market times are bad. But which is more just a delay, since long term, even a 50% drop is not the end of the world, since the bad market crashes have always fully recovered if you can hang in there and wait it out. This is definitely NOT speaking of bad investments recovering, but is instead speaking of good investments in bad times, which have always recovered. However there is always risk that withdrawals at suffering prices can deplete a small fund. More money in the fund can survive fixed amount withdrawals longer. But if no withdrawals, it should recover and last indefinitely.
My emphatic opinion is that all withdrawals ought to be planned to occur after retirement, not before. Repeated withdrawals drastically limit long term performance. The big issue is that retirement generally means having no job or salary, requiring living off of savings for maybe 30 years, perhaps even with major health care expenses, which will require some planning about providing income. The time to realize this is when young with still many years of great opportunity. The years are the best tool, don't waste them by waiting.
How to Make a Million Dollars for Retirement
Retirement is an income issue of course, since salary typically stops then, but we may live longer, possibly even 30 years more. So we need a plan for income then, which needs planning many years early.
Based on past S&P 500 performance history, earning a million dollars has been relatively easy, if given the sufficient span of years to let it grow. The bottom line is about Long Term. See the 2nd Future Value calculator above.
Maybe a million does take a lot of either years or investment, but the years are doable if starting early enough (meaning if you will just do it now). One million dollars is roughly 40 years in the S&P 500 from $10K, or 30 years from $35K, or 25 years from $60K, or 20 years from $100K. The long range of years is a magic free opportunity.
Here are Kiplinger's ideas to make a million.
Here is Warren Buffet's advice.
12.25% Annualized Return for 40 years is 1.122540 = 101.73x gain. From $10K is $1,017,311.58 result. Or say it was less gain, call it 8% Annualized. Then an initial $50K would be needed to make it to $1,000,000. And of course, you can start with less, and continue adding more as you go along. It is very doable if you do it. Calculator 2 will compute these cases. Or the S&P 500 calculator will show results of starting in any past year with any amount, and adding to it each year in any amount, to show the result today according to the past performance.
Compounding is easy, all you have to do is start early and then just wait long term. And think what adding even more investment to that now and then could have done. Starting or adding when the market is down (certainly including today) is a really good time (to buy low for maximum growth opportunity). A drop in the market is Not the end of the world. It offers opportunity to buy low, and then recovery provides opportunity for much additional gain. But low or not, the compounding of continued regular investment builds long term to a very healthy total. The young probably think other things are more important now, but I promise that your priorities will change near retirement time, after it is too late (trying to get your attention if you need it). That growth will become quite important at retirement time, and the best tool is an early start. It also continues earning and compounding after retirement, during 20 or 30 years of retirement withdrawals. If looking for magic, this comes pretty close, and seems a mighty big deal.
$10,000 would have been impossible for me at age 25, but starting with $1200, and adding $1200 a year ($100/month) to it for 40 years all along (absolutely without fail, adding $51.6K overall) also can create $1 Million. And more is better. Think of it as supporting yourself in your old age (no one else is going to help with that). Your retirement fund is surely about the best thing you can invest in.
Or one approach is you can create a self-directed IRA that invests in a S&P 500 fund. A S&P 500 Roth or IRA that adds the $6000 maximum every year could reach $1 Million in just 25 years.
And of course, if possible, a Roth instead of IRA or 401K would eliminate the taxes on the million, which would be a real big deal then.
Age 65 will come for all of us, when salary stops and we will need replacement income, which will become extremely important then. It is too late then, but planning makes that possible if you start early. Then thereafter, 4% withdrawals from $1,000,000 is $40,000 a year to add to Social Security. The fund would continue making its gains then, but if $1 Million, then withdrawing $40K a year would last 25 years even if zero additional gain. However taxes will be due on it, making any large lump sum withdrawal seem unwise. But spread out into smaller withdrawals over more years, taxes on high income will be the best problem you could have.
The easy and best solution is simply to start a good investment early, without fail, as early as possible, today. The 4% Rule was concerned with market bad times surviving 30 years of retirement withdrawals, after building substantial value with years of investment without withdrawals. From my own experience, my notion is that it takes many young people many years to realize that the many years of opportunity available to them would have been their very best and easiest and greatest tool BY FAR, but then there is no going back for a redo. Wasting that most valuable opportunity would be a tragic shame.
Again, these results are computed from the past years in history, and future results are not known. The standard obligatory investing advice is that past success does not guarantee future performance. There have been bad times (including today, 2022), but it always has recovered. Past success of long term investing in the S&P 500 seems clear enough (the 500 largest and most successful companies on US stock exchanges).
Compounding is certainly a real big deal in investments, making many long term years be the most profitable part. Only a year or two is not so dramatic, but compounding is exponential with time, becoming huge over many years. Long term can be exceptionably good. The S&P 500 (gain and reinvested dividends) has averaged an annual return around 12%. The future is not known, but it sure seems a good bet if you consider "long term"). It is true that the S&P 500 is down now. Two facts though, this or worse has happened several times over the years before, and it always recovers and continues. The S&P 500 was down 25% at $3585.62 on Oct 3 2022, but 40 years ago it started with only about $122, which is an increase of about 30x so far, not even counting the dividends.
Plug in your own numbers, but if your age is 40 years or less, then you still have at least 25 years before retirement at 65 (when you will certainly be needing a source of income). Today is the latest time to be considering that. And the investment can continue earning during 30 years of retirement withdrawals too. The years will be your largest growth multiplier, so wake up, and get with it, now (the term Buy Low means, the market is currently very low to making buying right now be the very best and most profitable time, very wise). I've just shown how $10K now can grow to $1 million in 40 years, so don't foolishly waste the years. (25 years will need about $60K.) The market always recovers, but lost years cannot be recovered.
Market Bad Times
The market goes up and down a little every day. It can make you crazy to watch it every day. But don't sweat the small stuff, it will be different tomorrow. Do understand that it is very normal to go up and down every day. Another page shows four years of this daily S&P 500 activity highlighting the peaks and valleys.
There are some bad times, and some people are scared off and will cash in and get out of the bad market, which is too late, because that simply locks in their losses and makes it permanent, not recoverable. Others grit their teeth and bear it, and hang on and wait for the recovery, and then continue on happily earning more money in the future good times. I recommend this latter course. It happens now and then, and waiting it out is no fun, but it pays off. The alternative is accepting the loss and making it real. But the world continues on, it does not end, and the market always recovers.
See What To Do when the market goes down ( Google, Panic selling is about the worst thing to do).
A Brief History of U.S. Bear Markets provides a very clear and informative view and details of our bear market history, that you ought to see (the orange and blue chart titled Bear Markets and Recoveries). That one does not show the good times, but for that, also see its second green graph just below it (click it to enlarge it slightly). Certainly you should realize that crashes do happen now and then, but also, that they do recover. A Bear Market is defined by at least a 20% decline, which can seem mighty uncomfortable at the time. The worst ones have hit -50%. After it happens, many investors panic and sell their investment then, which just makes their loss permanent and very real, no recovery possible. But instead sit tight and hang in there, and it will eventually recover into happy times again with continued gains. Most years are good, and the long term gains are hard to ignore. Politics and taxes do need watching, and bad times do happen every once in a while, but then recovery also happens too.
The TV market news always has experts predictions, which regardless if in good or bad times are always with half saying the market is going to crash, and half saying dramatic gains are just ahead. Don't take it too seriously, they all talk like they know, but you do need to realize that NO ONE knows what the market will do next. And certainly not WHEN it will do it. Someone will eventually happen to have been right, but there's no telling now who that will be. Bad times do happen now and then, but the market is good much more often than not. Sill, good advice is to invest in a few different ways (diversification), hoping one way will be best.
The market is usually good, with many more good years than not, and long term does win. But starting the calculator data at 1970 was deliberately chosen here to include actual real data for some seriously bad times. IMO, government political actions are the usual cause. The crashes of 1974 and 1982 and 2001 and 2008 were exceptionally bad economic and market times, but they all recovered to new highs.
In contrast, the 2020 pandemic crash, -34% was tough on the economy and market, but that cause was not economic or political, and the market recovered in 5 months to another all time record high. And 2021 ended up 28.9% more. There were other smaller dips, but the 1970s were a poor market and the 2000s were worse (two crashes), all down near 50%. The recovery from 2008 took the longest in modern history (until 2012), and the entire 2000s decade was down 9.4% (a "lost decade"). So 2000 was the worst year to start the fund in the last 50 years of history. The price of the actual S&P 500 was under 1000 in 1997, again in 2002, and again in 2008, but even so, reached 4700 in 2021. That is just the index price (less dividends), but the compounded gains have been exponential in the many years of gains. Investing for long term is the way to bet.
2022 was bad too, and not fully recovered yet. The last record high was 4796.59 on 3 January 2022, then the S&P 500 bottom low on October 12 was -25.4% at 3577.03. 2023 is showing better signs, at least for the large growth stocks, but it's still a ways to go to full recovery.
This current Google chart is here.
The 2001 and 2008 dips had bottoms at -50%, and made the entire 2000-2009 decade lose 9.4%. It was bad, but fully recovered in 2013. The 2020 pandemic dip was deep (-34%) but relatively short duration. See a current status of Total Returns of 100+ stocks (including largest 50 in the S&P 500).
Corrections: Market drops of more than 10% below the High are called Corrections. These are fairly routine, and happen more often then you might think, but they typically don't last long before the correction recovers. The market goes up and down every day. Again, we learn to take it in stride, and in fact, the low times are often welcomed as great times to buy more at the lower price. That is the meaning of "Buy low, sell high". When many are panicking and selling, others are eagerly buying more then, to make their recovery be very profitable. Every Sell is a Buy by someone else sensing opportunity.
Bear Markets: Drops of more than 20% are called Bear Markets, occurring less often but much more severe. These might reach 50% down in truly bad economic times, but they have always finally recovered (could take a year or two then, or even more). The worst action would be to cash in by selling during the low times, which simply locks in your loss permanently with no opportunity for recovery. Buying more then is the better choice, the recovery gain will be very profitable. However, trying to time the exact bottom of the market is impossible. No one can judge the bottom until long after, but do not hurry, the bottom likely will not be in the first several weeks. If you think it is at a bottom, the customary advice then is don't invest more all at once, but a little more several times all along. Dumb luck is the only way to time the bottom, but regardless, you are buying low.
The end of a bear market is not formally defined, and there are different ideas about it.
Many consider the end of a bear market is when it has risen 20% from the low. However, if it had fallen 40%, then only +20% is still down 28% from the previous High. The -40% needs +66.7% to recover the previous High.
A few others think an index (Dow Jones, S&P 500, Nasdaq, etc) remains in Bear Market status until it rises to within 10% of the previous High (which is then also out of Correction status).'
I instead think it is a good argument that is still down until next high.
One accounting of this says "Most declines are quickly erased but the deeper the stock market decline, the longer the recovery." They make this report about history (I am unsure how precise the numbers could be in the future):
- 5% or greater pullbacks occur about every 7 months
- 10% or greater pullbacks occur about every 2 years
- 20% or greater pullbacks occur about every 7 years
And the few worst past ones have reached 50% down. But it happens, and then it recovers, always has. The 2020 pandemic dropped the market 34% in March, quite bad but short. It recovered quickly 100% by August, and the year ended up at a new record high with 18% annual gain despite the lost months. In the following March the S&P had achieved a 76% gain (a year after the low). Recovery of bad economic situations can take a couple of years though, until the economy is corrected. 1974, 2001 and 2008 crashes were spectacularly bad, and each took a few years to recover. But they do recover.
Most companies were down and negative for the year 2022. The leading growth stocks (Apple, Microsoft, Amazon, Google, Nvidia, Tesla, etc) were down big time, -25 to -60% or more. It's just market fears due to all the current problems. There is nothing wrong with the companies, their earnings were doing great. The Russian invasion of Ukraine is of course a big worry, but our painful self-inflicted inflation is another of the current big concerns about the US economy. The government's massive spending of Trillions is a large factor (mostly give-aways hoping for votes and more control), and their own self-imposed policies on businesses last year put limits on our own U.S. oil production, which has had very strong effect increasing inflation. The U.S. oil production had become self-sufficient before, but now we must import oil again, and pay the price. Oil affects the price of about everything (transportation, plastics, etc), and the oil price has increased U.S. inflation too, which is easing some now, but still the worst inflation in 41 years. But the cavalry will come and the market has always recovered. And 2023 already looks very promising for many growth stocks, but there is still a ways to go. Many other major companies are still even more negative in 2023.
Recessions: The definition of a recession is about the decline of national GDP growth and the rise of unemployment. Recessions are NOT about the stock market. Some imagine a recession is just when there is two consecutive declining GDP quarters, and we do have that now, but a recession is also additionally about unemployment statistics, which are still rather low now, so there has been no recession called. Technically, the National Bureau of Economic Research (NBER) decides if and when it is actually a recession. The unemployment rate is still quite low right now, so it is not yet a recession. It's bad though anyway.
Predictions about the market future are only guesses, and at any given time, many "expert" guesses heard will always be rosy and bright, and many others are always gloom and doom. It doesn't take long to understand that no one actually knows the future. I am certainly no expert, and I don't know either, but it is easy to see that the long term S&P 500 graph (meaning a few decades) sure always looks great, but with some dips. The market goes up and down every day of course, with many more good years than bad years (but yes, expect a few bad years as a matter of course). Withdrawing everything when it is down in bad years is the worst plan, which simply guarantees the loss is real and permanent, with no recovery possible. It is scary, and it takes some patience, but it will recover if no withdrawals. Market crashes do happen every few years, and they are survivable. The S&P 500 does recover.
But there is no one safe magic percentage withdrawal such as 4%. Because how long a fund can survive retirement withdrawals in bad times actually depends on how much money it still makes available. This 4% number does assume it is recalculated every year (same 4% percentage, which calculates different withdrawal dollars each year, depending on the different current investment total).
- Before retirement, just hang in there. Make no withdrawals, preserve the funds value. Assuming it is a good investment, adding additional investment is good, and doing it while prices are low is the right time to see even greater gains during recovery.
- At retirement, salary stops and withdrawals likely begin. There might still be Social Security then, but you need more, and your fund can add to it. Has the market dropped? How much had the fund previously grown? How much of the fund value was previously withdrawn?
- Specifically, how much value is left in the fund to support recovery and withdrawals during retirement? Was the fund newly started or had it grown large?
4% withdrawal from $1 Million is $40K a year and will last 25 years even if no further growth, but 4% of $10K is $400 a year ($33 a month) which doesn't seem much help.
- How long the recovery will take is unknowable. Perhaps a year, or maybe two, or maybe less, or perhaps even more. Jan 2 2023 is one year since the last record high of the S&P 500 Index (and the S&P 500 low on 30 Sept 2022 reached -25%, and still nearly -20% at year end). But the 2020 Covid pandemic crash (-34%) was only six months between record highs. The 2001 and 2008 crashes were each about 50% and made the entire 2000 decade negative. But it always has recovered.
Building a larger fund by retirement time is the best help, and it should be seriously planned. The more years you have to do it will make it much easier. Pulling the money out of the market after it falls low simply ensures the loss is both real and permanent (with no chance of recovery then). But it always has recovered.
We don't know those things about the future, but we can see such instances in the past, to suspect what we might expect sometime in the future. We can see that it has always recovered. If the fund value drops 50%, then from there, it must recover 100% to reach the same original value again. Our own withdrawals also during the low times are dangerous to the survival of our fund. Even innocent looking fixed amount withdrawals can become drastic in bad times.
The advantage of a percentage withdrawal is that (if the withdrawal rate is then adjusted every year to the same percentage of the funds then current value), the withdrawal becomes very low when the fund value is low. Except actual withdrawals are usually set up as fixed dollar amounts every month. But a percentage withdrawal definitely implies the withdrawal is recomputed every year from current fund value, which becomes less withdrawal when the fund value is lower.
Withdrawals of course depend on money still remaining available in the fund. If no withdrawals, the fund will survive and continue growing, but withdrawals will drop the fund value fast, especially when low in bad times. The S&P calculator program cannot predict future gains, but its purpose is to see the result of some typical actual bad times from recent history, and also to see the results of withdrawals, to help know the best future plan.
Again, this is definitely NOT speaking of bad investments recovering, but is instead speaking of good investments in bad times.
25 years ago, the original 4% Rule data looked at the market back to include the Great Crash of 1929, but times and laws and market rules have since changed so much, and IMO the last 50 years seem typical enough of today's world. The calculator Test on the previous page is ONLY about actual S&P 500 Index history. It has no historical data for any other funds except S&P 500 Index funds (which are a very popular class). All of those will show the same S&P result, except they do vary in the fee they charge (the fund fee is withdrawn every year, and a fund with a low fee is a big plus).
