S&P 500 Index Mutual Funds and 4% Rule

The S&P 500 calculator is on the previous page, and it includes withdrawal capability. My interest in the calculator was about how appropriate is the 4% Rule for a 100% stock fund like the S&P 500? This page is general introductory info describing the 4% Rule, the S&P 500, the general market, bonds, Bear markets, taxes, etc. This is also about some market stuff that you should know.

A Few Things To Know, if you don't already

The 4% Rule concept:  This idea was originally about balanced funds, meaning stocks balanced with bonds, perhaps containing 50% stocks and 50% bonds. The idea then was that adding bonds can shield some portion from market volatility, and at least in the past, could also provide some earnings when the market is down. My own notion is that a 50-50 balanced fund might indeed drop half as much during a market crash, but it also only earns half as much in the good times (and there are many more good times than bad). The 4% withdrawal rate has been promoted as safe, arrived at by testing past market history as lasting through 30 years of withdrawals in retirement from any starting date. Any X% withdrawal rate might seem safe if the fund average earning gain was X% to support it, but years vary in gains, and the average is not linear. The bonds in balanced funds used to pay more to aid that, but times change, and bonds pay very little now. 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 few 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. 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 50% composed of bonds called 50/50 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. The 4% Rule was from a 1994 investigation of historical market data that tested for a reliable safe withdrawal amount 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 another factor. The bonds did provide some income in those days for a degree of safety in bear markets. Here's a chart of the Federal bank's interest rate history, and I'm thinking the 4% Rule look in 1994 could not foresee today's zero interest rate. A good recent article about the 4% withdrawal number is at Morningstar.

A S&P 500 Index fund is widely considered to be one of the best market investment choices for most people (those who are not market professionals following the market closely). Here is one link about that. An Index fund keeps its holdings exactly matched with the index it is tracking (to match the same performance). The S&P 500 is the collection of the 500 largest US publicly-held companies, (all are 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 US market capitalization. Capitalization is a companies total dollar market equity value, equal to the companies total stock shares x price per share. The S&P 500 index is weighted by capitalization, so that the largest companies count proportionally more in the index, according to their greater overall value.

Similarly, the Total Stock Market Index Fund (Vanguard VTSAX) has 4000+ companies (blend of large-cap, mid-cap, and small-cap U.S. companies), and like S&P 500, it is similarly weighted by capitalization, which means that the S&P 500 are the top 500, and the smaller ones are weighted much less strongly. So in effect, it has similar performance as the S&P 500 (usually within ±1% or ±2% less than the S&P 500 index in individual years, and closer long term).
There also are various S&P Equally Weighted funds, either all of the 500 or just of specific industries, for example ticker RSP.

All of the S&P 500 Index funds try to exactly match the S&P 500 Index performance, but these funds do have different expense fees. There are actually 505 listed tickers in the S&P 500, because five companies have two major classes of public common stock included (Google, Discovery, Comcast, News Corp, 21st Century Fox). Google's company name is actually Alphabet, with two stock classes A and C, with two tickers GOOGL and GOOG, which are added together in the table here.

S&P 500 Weighting
Top 10 as of 19 May 2022
Alphabet (Google)GOOG3.88%
Class A & CGOOGL
Berkshire Class BBRK.B1.69%
United HealthUNH1.37%
Meta (Facebook)FB1.34%
S&P 500 Weightings as percentage of the S&P 500 Index are as shown. The weighting of the five largest companies comprise about 23% of the S&P 500 index. Whereas equal weighting of the 500 companies would be 1/500 at 0.2% each, except the S&P is instead weighted by capitalization (total dollar value of stock). As weighted, the smallest companies in the S&P 500 list get down to about 0.01% weighting, but which are still among the 500 largest US companies. Weightings vary with current prices, and weightings are computed before each trading day. To be eligible for S&P 500 inclusion, each company must be publicly held and each is currently at least $13 Billion capitalization, but all are selected by a committee with a few more performance concerns. 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).

See current weighting of all of the S&P 500 companies. Near 80% of the S&P 500 companies pay dividends in some degree (see a list of these ranked by dividend).

See largest companies NOT in the S&P 500 (this list includes Berkshire Hathaway private class A as first entry, however Berkshire Hathaway public class B was added to S&P 500 in 2010).

Indexed funds vs. Actively Managed funds: Index funds simply try to match performance of the fund to the actual index of the companies by using computers automatically buying the matching shares of each company (passive investing, low fee cost). Whereas actively managed funds instead have a manager trying to pick the best paying investments (at larger fee cost). And managers might do that now and then, but next year may be different, and for long term over multiple years, it is commonly said that indexed S&P 500 earnings beat managers about 90% of the time.

So yes, there are other funds and stocks that might sometimes earn more than the S&P 500 Index (many of largest of those companies are also in the S&P 500, contributing their share, which is diversification). However their downside is these currently hot stocks are more volatile, their prices can swing widely, which is great when it goes up, but is costly when it comes down. There certainly can be big surprises. If investing in individual stocks, you will need to watch closely, and know when and why to switch stocks (preferably before it changes). The S&P 500 goes up and down too, but it can be more comfortable without close watching.

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 US large cap stocks (which includes No small caps, emerging markets, foreign, 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 in the box below). 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. Some people do fear anything in the market is too much risk (yes, the market can crash in bad times, but then it recovers). At least it does if it was a good investment, and the S&P 500 are the largest and most successful Blue Chip companies in the US, which is a good strong bet.

Compounding gains: The greater number of years of long-term investments makes the compounding of gains be a huge exponential function (with years as the exponent power), which is an astoundingly big deal. A fixed 10% gain in each of 40 years becomes a final value of 1.1040 = 45x the initial value and 4400% overall gain. The market gains vary each year (and are often large), see below for computing that. In addition to the price gains, another major factor is that reinvested S&P 500 dividends add very roughly about 2% to total returns each year, and then those additions see gains too, and those gains see more gains, compounding every following year. Even if a few random years are negative, compounded earnings are a Real Big Deal, so think of a long term investment always with reinvested dividends. Start young, and then it will be waiting at retirement. The S&P 500 calculator on previous page shows this with 50 years of past S&P 500 history. The math of compounding is shown below.

The fund's average annual gain is Not the absolute measure of short term withdrawal safety. Because the average is just the sum of all years gain divided by the number of years, accurate "on average" over the total years, but do realize that long term compounding is about the multiplication product of the years of gains. The average can hide a few adjacent down years during which multiple withdrawals could deplete the fund. The numerical S&P average will recover, but if all your funds money was depleted earlier, it ends there. The first years are the higher risk, before it has earned much, since more money in the fund will of course always last longer in a crisis. So first building more money in the fund (before withdrawals) is the insurance to last longer when down, and to make recovery easier. Reason would suggest that first allowing maybe 20 or more 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, 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, because it's a percentage thing. 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 chart of a few years of S&P 500 record highs. But when and if it is down low, 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 are not limited to a reasonable current percentage, of which an example is shown in the Test section on previous calculator page. 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 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 huge 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 a tiny 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 calculator here to more clearly define the end of Survival due to depletion. Possibly this limit should be higher for a stronger recovery, and you can change it, because the fund does need some money left to be able to earn a faster recovery. 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. Withdrawals make remaining Fund Value be a very major survivability factor (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.

Knowing the first facts about Bonds is especially important today

Investing in bonds is a very different game than investing in stock. I am NOT encouraging bonds, just offering some facts. Bonds may have paid 4% dividends in 1994, helping to support withdrawals, but interest rate has bottomed out near zero today, so IMO, now bonds seem an outdated investment idea. However, bonds do protect savings from market volatility, and in a market crash, a 50/50 balanced fund may drop half as much as a 100% stock fund, and the bonds still could provide some earnings. But markets always do recover, and bonds don't earn what the 100% stock fund can, and don't earn today what bonds have historically earned, and don't even match inflation today. Most of all, do realize that bonds are also quite volatile too, maybe safe from the market, however bond value is very seriously affected by current interest rate changes, which are occurring this year. Also, inflation is a serious concern, at a 40 year high at 8.5% in March 2022.

Existing bonds do still pay their same fixed dividends, but there's much more to know about the volatility. When inflation increases interest rates of new bonds, it lowers old bond resell values. That's because no one would pay full price for old 1% bonds if they can buy new 2% bonds at same face value price. So then buying two existing 1% bonds is required to match earnings of one new 2% bond. So existing old bond resale value can drop to half each time interest rate doubles. And also vice versa, lower interest rates will increase the value of existing bonds that still pay more. (See Duration next below). Also some bonds are "callable" (most municipal bonds and some corporate bonds), with a callable date when the issuer can redeem the bond early (which terminates dividend income), perhaps planning to issue new bonds paying lower interest rate (if rates are falling).

Bond price changes when reselling are taxed as capital gains if held one year or more. However bond dividends are taxed like interest, at regular income tax rates (except municipal bond dividends are tax free of federal tax, and sometimes free of state tax in same state, at least in some states).

Bonds do still pay full face value when redeemed at maturity (or when called earlier). So if you buy bonds directly yourself, and hold until redeemed at maturity, the return will be as expected. However bond funds must buy and sell bonds continually, as investors buy and sell shares. And while bonds are still held, resell value varies daily with current interest rates. Bond funds recompute bond values with every days interest rate change. However, bond value does not vary much if close to maturity, so a complication is that bond value sensitivity to interest rates depends on how close it is to maturity, in a special calculation called Duration.

Definition of bond "Duration":  Bond resell value varies with current interest rates. This concept is Very Important. The term Duration computes that for Each 1% change in current interest rates, the resell value of existing bonds is expected to change in the opposite direction by "Duration" percent (proportional to price drop of existing bonds). Interest rates dropped the couple of prior years, so existing bond resell values increased then, and bond funds showed better results. But vice versa, existing bonds lose resell value when interest rates increase (and now 1 year return is negative, and interest rates are near zero now with only one direction they can move. The U.S. Fed has announced interest rate increases are expected in 2022 due to inflation.)

Bonds purchased directly do pay full face value when redeemed at maturity or recall. However bond funds must buy and sell bonds continually as investors buy and sell shares.

Morningstar shows the bond Duration (in balanced funds at Portfolio tab, Bond sub-tab, if any). The meaning of a Duration of say 3 means the expected bond value will decrease 3% with each 1% interest rate increase, and vice versa, existing bond values also increase when interest rates fall. But either way, when redeemed at maturity they do still pay face value. Short term bonds will have lower duration with lower risk from interest rates, but they pay even less. Bonds rated A are considered investment grade. Generally bonds rated B are considered speculative and non-investment grade, and C rating is a highly speculative bet (speculative meaning paying greater interest, but with greater risk they could fail and default and not redeem at all).

But don't be confused by Morningstar's market return statistics showing bond and balanced funds had good performance history in recent past years. They in fact did, when interest rates fell more than 2% over 2019 and 2020, causing the existing bonds to increase in resell value. So also check their current YTD (Year To Date) results too. The current SEC 30 day yield is shown annualized to one total year, which is the accurate current rate value today if continued, but it likely changes during the year. The federal bank interest rate is near zero now, so the only way it can go now is up, and it is increasing a bit now with inflation (and when and if it does increase, values of existing bonds then will go down). Bonds held until redemption at maturity do retain full face value then, except bond funds might not be able to hold them to maturity when their shareholders are ordering withdrawals. Since interest rates are near zero now, the danger for existing bonds is that rising rates (and lower values) are the only change possible now. We are expecting inflation increases and increasing interest rates. Bond dividend income is taxed with regular income tax rates, but the price changes are capital gains or losses if held a year or more.

If considering stock dividends for income, there are about 65 stocks referred to as Aristocrat Stocks, which to be included, companies must be in the S&P 500 (largest US 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. The annual increases can be small, and a good half of them still pay less than 2.5% dividends, and a few of those pay less than 1%. A favorite of Warren Buffet at Berkshire Hathaway is Coca Cola (COKE) paying 3% plus decent earnings. Whereas most of the best growth stocks pay no dividends, and also can have prices varying widely.

Inflation has historically averaged about 3%. Bonds earn less than that now, but the S&P 500 total returns (plus its dividends) has averaged 11.77% for the last 50 years (including the 13 negative years).

Since very low earnings today 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. 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.

Investing for Retirement

So if interest rate (of bonds in balanced funds) is near zero today, what about a "4% rule" for 100% in a S&P 500 Index fund? The calculator and Test on the first page elaborates about that.

My strong 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. The time to realize this is when young with still many years of great opportunity.

Computing Compounding of Gains with Time

Compounding is the largest gain effect of long term market investments. One year has earnings, which (if positive) then that greater working total increases the greater total amount producing earnings the next year, and continuing so on growing every year. But market gain is variably different every year, so here's a math example with six years of gains (don't forget to add any reinvested dividends to gains).

The Manual Calculation Method

Percentage gain =
New value - Old value
Old value
× 100

From the computed table, this overall six year gain is ((19704.85 - 10000) / 10000) × 100 = 97.048% gain.

Or easier, it can also be computed as (1.15 × 1.22 × 1.10 × 0.95 × 1.12 × 1.20 - 1) × 100 = 97.048% gain.

Either way, the order of the years makes no final difference. Compounding is simply repeated multiplication of gains.

And then, the final Total Result value is (1 + gain/100) × initial invested value. For an initial $10000, then 1 + 97.048% is 1.97048 × $10000 = $19704.85. This "1 +" represents the initial investment value, added to the years gain percentage. The percentages of gain compute the same regardless of any value of dollars. As a check here (97% gain), we know that as approximate numbers, 100% gain is 2x total value, which it is almost here.

This procedure would compare with the standard compounding formula of (1 + interest rate/100)years if the gain were the same every year. But it is not the same here. To include compounding (which is about multiplication of gains), you could instead "Annualize it", to view it as Annualized gain, which computes a rate to be as if the same interest rate every year.

For different gains, each year's gain is an individual multiplier of the initial value. Each factor is (1 + gain/100), with 15% gain becoming the 1.15x multiplier of value. This same method is also valid for negative gains, for example -5% is 1 + (-5/100) resulting in 0.95x value that year. The -1 is subtracting the 1x initial value, which is subtracted to see just the gain. Or the 1 is added to gain (the 1 is actually 1 x 100, which is 100% of the original initial value), to see the final total value result. Just saying, the amount of "gain" does not include the initial value, but the total result does.

Annualized gain includes the long term compounding, and is a hypothetical number computed to be as if the final result had an equal gain rate every year. Annualized gain is for comparisons, and it computes what that same year gain rate every year would be to get the same compounded result. It hides any volatility, only computing a smooth level path that would give the same result in the same time. To compute annualized gain for this table example is:

In history, most by far of the S&P 500 years are positive gain, but market years vary, and the future is always unknown. However the preceding 50 years of the S&P 500 have actually averaged about 12% simple average gain (speaking of individual years Total Return without compounding, but which includes reinvested dividends). Your retirement might be a long time away, but the wise are already planning for it today, because time is by far the best investing tool (assuming a good investment worth keeping). Wasting that most valuable opportunity would be a real shame and loss. Lost time is not recoverable.

Compounding is certainly a really big deal, making long term investments be the most profitable part. One year won't do so much, but compounding is exponential with time, becoming huge over the good years. Long term can be exceptionably good. The S&P 500 has averaged an annual return near 12% for the last 50 years (including dividends). The future is not known, but it sure seems a good bet if you consider "long term").

How to make a Million dollars for retirement

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. Investing more grows larger faster, but twice the years is vastly more valuable than twice the starting investment. And more is definitely better. Withdrawals of 4% of $100,000 is $4,000 a year, but 4% of $1,000,000 is $40,000 a year.

The long range of years is a great opportunity. The calculator on previous calculator page can show that only $10,000 invested in 1980 for 40 years (which sounds like an extremely long time, but it could be just age 25 to 65) and untouched until today would have been worth $1 Million now. That's about 12% gain annually, with dividends reinvested and compounded for 40 years, despite including a few very bad market years. (Starting in any year, and/or with any other starting value, can be shown in the Survival Test Mode chart with calculator on previous calculator page). The $10,000 doesn't earn so much in the beginning, but after it's grown to six digits in the last few years, the growth seems amazing. And that growth keeps earning more, which is the concept of compounding.

Compounding is easy, all you have to do is wait (but it requires starting early and waiting long term). And think what adding even more investment to that all along could have done. That growth will become quite important at retirement time, but it requires an early start. It also continues earning and compounding during the maybe 30 years of retirement withdrawals. If looking for magic, this comes pretty close, and seems a mighty big deal.

$10,000 might have seemed impossible for me at age 25, but starting with $1200, and adding $1200 a year ($100/month) to it for 40 years all along (without fail, adding $51.6K overall) also creates $1 Million.
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 30 years (example 5 on previous calculator page). Or you can of course do both.

Age 65 will come for all of us, when salary stops and we will need replacement income, which will become very important then. Planning makes that possible if you start early. Then thereafter, 4% withdrawals from $1,000,000 is $40,000 a year to help live on Social Security. The fund would continue making its gains then, but if $1 Million, $40K a year would last 25 years even if zero additional gain.

The easy and best solution is simply to start a good investment early, without fail, as early as possible. 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 is a real shame.

Again, these results are computed from the past years in history, and future results are not known. Past success does not guarantee future performance.

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.

Corrections: Market drops of more then 10% (from some past recent price) are called Corrections. These are fairly routine, and happen more often then you might think, but they don't last long before the correction recovers. 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".

Bear Markets: Drops of more than 20% are called Bear Markets, occurring very much 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). The worst choice would be to cash in by selling during the low times, which simply locks in your loss with no opportunity for recovery. Buying more then is the better choice, but timing the exact bottom of the market is impossible (the bottom likely will not be in the first few days or weeks though).

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:

And the few worst ones have reached 50% down. But 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 a few lost months. In the following March the S&P had achieved a 76% gain (a year from the low). Recovery of bad economic situations can take a year or two 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.

The S&P 500 was down 17.67% on May 18, 2022 (from year end). Leading growth stocks are down even more.

Recessions: The definition of a recession is more vague, and it is related more to decline of national GDP growth (two consecutive declining quarters) and unemployment statistics instead of the stock market. It's bad though, and recessions certainly have a major impact on the market.

This A Brief History of U.S. Bear Markets provides a very clear and informative view and details of our bear market history. That one does not show the good times, but for that, also see the second green graph just below it (click it to enlarge it a bit). 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%. Many investors panic and sell and end their fund then, which just makes their loss permanent and very real. But instead 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 market is usually good, with many more good years than not, and long term wins. But starting the calculator data at 1970 was deliberately chosen here to include actual real data for some seriously bad times. The crashes of 1974 and 1982 and 2001 and 2008 were exceptionally bad economic and market times. In contrast, the 2020 pandemic crash, -34% was tough on the economy and market, but its cause was not economic or political, and the market recovered quickly to current all time record highs. And there were other smaller dips, but the 1970s were poor (one crash to 50%) and the 2000s were worse (two crashes to 50%). The recovery from 2008 took the longest in modern history (until 2012), and the entire 2000s decade was down 9.4% (called the "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, has reached $4700 in 2021. That is just the price, but the compounded gains have been exponential in the many years of gains. Investing for long term is the way to bet.

This graph is Google. The 2001 and 2008 dips made the entire 2000 decade lose 9.4%. The 2020 pandemic dip was deep (-34%) but short. Currently the S&P 500 reached -17% from year end on 20 May 2022.

The S&P calculator on previous page shows these annual chart values too, but it shows year end values instead of the actual dips.

Predictions about the market future are largely 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 figure out 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, with many more good years than bad years (but yes, expect a few bad years as a matter of course). Withdrawing everything is the worst plan in the bad years, that simply guarantees the loss is real and permanent. It will recover if no withdrawals. But there is no one safe magic percentage withdrawal such as 4%. Because how long a fund can survive withdrawals in bad times depends on:

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. The one advantage of a percentage withdrawal is that (if the withdrawal rate is then adjusted), the withdrawal becomes very low when the fund value is low. Except actual withdrawals are set up as fixed dollar amounts every month. So a percentage withdrawal 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. This 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. This calculator Test 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).

How much withdrawal can survive bad crashes is a vague question though. Situations vary. A market crash just when you need the withdrawals is the fear. Another danger is an early crash before the fund has grown to be able to survive it. Do realize if a fund loses 50%, the low price then has to regain 100% to recover.

The market goes up and down every day, but fund survival depends on how much value is in the fund, and specifically, how much value is also being withdrawn from the fund.

The commonly seen market advice about risk is "Past success does not guarantee future performance." Meaning, we don't know the future, and unexpected bad times do happen. But IMO, that is speaking of short term events (up to a few years). I get my encouragement by looking at a graph of the S&P 500 history. Market gains certainly offset inflation, however do unclick the Inflation-Adjusted box there to show the actual S&P data. The world might someday end, but the graph long term trend does look very promising. :) The notches in the rising curve are the bad times, and there's been many of them, but they get forgotten as the curve goes up. It does show that the 1970s and the 2000s decades were serious bad times (a mouse-over there shows the dates). The bad times will seem drastically bad at the time, but they always recover (might take a year or two, but retirement is a long term goal, right?)

The actual risk is that if the fund is saving for a specific time, like for retirement or a child's college expense, a 100% recovery might not be fully available at the time needed. But college is a four year duration, not all needed at once on the first day, so it has more time. And retirement is possibly a 30 year duration, and growth continues all during that time. We don't know about the future, but the program can show the effects of some past bad time drops.

Fund values seriously suffer from any withdrawal, both by reducing the remaining balance, which also limits the future gains. IRA RMD (Required Minimum Distribution) is required after age 72, but otherwise withdrawals are a choice, but if the withdrawn money had remained invested, that money would have earned more money itself, repeated every year, compounded. It is certainly wise to cut back on withdrawals in really bad times, to avoid depleting the fund. And it is always best to reinvest the dividends, and you can see the tremendous difference that makes here (of compounded growth in time). Bad times are the worst possible time to sell out and close the fund since that absolutely locks in and guarantees maximum loss, with no recovery possible. The market will drop in value now and then, maybe to around 50% in the very worst times, which will seem catastrophic and unbearable at the time. But if you can hang in there, it will recover and will then be forgotten (eventually, which could be fast, or could take one or more years). It no withdrawals, the S&P 500 has always recovered to hit new highs, and will resume and continue earning more. Currently, the last ten years have had good results, but the market behavior before 2010 might be considered expected now and then, however it always recovers.

USA Income Tax Summary

(but tax laws can change)

Also see these pages:
Previous page with the S&P calculator.
Next page, Stock Dividends are valuable, but withdrawing them is Not income.

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