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 perhaps 40% 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 of Withdrawals

The 4% Rule was considered a safe retirement withdrawal rate in retirement. However it was originally a study about balanced funds, meaning funds with stocks balanced with bonds, containing 50% stocks and 50% bonds (50/50, but there are also other mixes). 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 idea is that the fund should earn more than the withdrawals, but the fund can never gain if withdrawals equal the gains.

So 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 it was a study of 50/50 stock and bonds, so concerns are that it did not specify any specific fund investments, nor any value of continuing fund growth, nor any specific bad time durations, all of which seem 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 withdrawals wait until the fund grew to $1 Million dollars, then even if 5% withdrawal every year is $50K a year, 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 it's wise to start investing early so the fund has 30 years to grow to $1 Million first. Time is the best plan.

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 of a few years duration, continuing a fixed dollar withdrawal can be devastating for a relatively small fund.

But instead of balanced funds, I also wondered about withdrawals from a fund of 100% stocks (like the S&P 500 Index funds for example). This calculator looks at that. Any X% percentage withdrawal rate might seem safe if the fund average earning gain was more than X% to support it, except years vary in gains, at an irregular rate. A 50% loss (say $1000 down to $500) requires a 100% gain to recover, which might take a few years (see calculator 4 on another page). 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.

An issue of a 4% Rule is that it does not specify any specific fund type or contents or gain, nor any specific fund value. 4% is certainly Not an absolute hard rule. 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. So start early and let it grow.

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), so a percentage (recomputed each year) withdraws much less when fund is low, near zero withdrawal when near zero value, and worst case still always leaves some 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 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.

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 best market investment choices for most people (those who are not market professionals following the market closely every minute). These Index funds try to exactly match the S&P 500 Index performance, but have different methods and schedules of doing that, and these funds do have different expense fees (and choosing one with lower fees leave more for you to keep every year). 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.

This current Google chart is here. It shows variable spans from 1 day to 30 years. I don't know the S&P 500 Index initial price when it started in 1957 (relatively close to zero though), but was up to $100 in 1980. And it has reached $6000 now (13 Oct 2024). There have been some bad dips, but it recovers long term (and its laws have been improved now).

The value of each companies stock in the S&P 500 index is weighted by capitalization (which is the total value of the companies public stock), so that the largest (most value) companies count proportionally more in the index, according to their overall capitalization dollar value. Capitalization is a companies total dollar market equity value, which is the companies number of public stock shares × current price per share (weighted as each dollar instead of each company).

The S&P 500 Index contains near 80% of the total U.S. market capitalization (dollars). The weighting makes the few top stocks be a major influence on the index. And the many S&P 500 Index funds compose half of the fund market.

There are actually 503 tickers in the S&P 500 (today, but that 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 the two tickers are weighted individually, but I add them together in the table here (GOOG has no voting rights). The S&P 500 rules today exclude companies with more than one class of public stock, but these three are grandfathered.

S&P 500 Weightings as a percentage of the S&P 500 Index are as shown by their current top 20 here. It seems interesting as this weighting represents the percentage of the total S&P 500 Index value that each companies entire public stock value represents. But the weighting falls off fast after the top few. If it were to be equal weighting, each company weighting would be 0.2% (1/500).

There is no money actually in the S&P 500 Index itself. The money is in the companies stock, and the Index is just a computed number of the worth of all the companies total public stock value (the total would be about $45 Trillion). However the many S&P 500 funds where you invest do buy the stocks in this proportion, and do keep them matching at the current ratio. A weighting of 7% means that the companies stock shares are adjusted to be 7% of the total value in the fund.

The weighting of each of the top three companies (each about 7%) is 70 times larger than the smallest member company (0.1%), indicating that the $3 Trillion companies are not counted the same as the $16 Billon smallest companies in the Index. Since company values are not equal, the S&P 500 is weighted by capitalization (total dollar value of each company's public stock). These weighting numbers are actual percentages of the total Index value, so that all of the 500 "Weights" add to 100%. The weighting numbers vary slightly with daily performance, computed before each trading day (to compute the S&P 500 Index).

The S&P 500 weighting is per dollar invested in the company instead of per company. However notions vary, and some do fault this weighting method because the top few companies do dominate the total, but that's because it's where the money is, and the larger companies do contribute most of the worth changes. In the same way, most stock indexes do this weighting by capitalization too (except Dow Jones is by share price.

The S&P 500 industries are divided into 11 sectors by industry, to compare how Technology, Communication, Industrial, Health Care, Utilities, Financial, Real estate, etc. are comparing to each other.

Apple was previously number 1, but now Microsoft and Apple and recently Nvidia are currently swapping back and forth among the top 3, which totals about 20% of the S&P 500. Apple's and Microsoft's and now also Nivida's worth's are (or were) each near $3 Trillion, so each of these are near 7% of the total S&P 500 capitalization. But the midpoint at company number 250 is weighted at about 0.07%, and the smallest of these 500 are about 0.01% weighting, so they don't actually count for much in the S&P 500 Index, but a few hundred of them do add up.

To be eligible for S&P 500 inclusion today, each company must have publicly held stock (but is permitted entrance today if ONLY ONE public stock class). 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 replace it. These S&P 500 are the Big Boys, the largest and most financially successful public stocks. Then all of the S&P 500 index funds simply try to exactly track and match the performance of the S&P 500 index.

Index funds are passive investing, meaning controlled by computers adjusting company share counts to match an index value, as opposed to an active human manager selecting the stocks the fund buys. Most Index funds are weighted by capitalization, and the fees are less.

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. One for example is ticker RSP. In this fund, all 503 tickers are weighted at 0.02, equally (1/500). However equal weighting then effectively underweights technology and other growth areas. It does seem to have a slight advantage in bad times (when the large growth stocks are well down), but overall, it appears that the S&P 500 Index usually beats its earnings by a percent or so.

The Total Stock Market Index Fund (Vanguard VTSAX) has stock of 3992 companies, which are a blend of selected large-cap, mid-cap, and small-cap U.S. companies. Fidelity FSKAS, Schwab SWTSX and others have similar funds. These are also weighted by capitalization, meaning the top few companies dominate, and smaller companies don't count much except as a group. To me, the Total Stock Market fund seems mostly a conceptual idea, because while it includes many smaller companies, it is also weighted by capitalization like the S&P 500, so most of the value is from the top of the list, with the smaller stocks weighted much more negligibly, with very small contributions to the Index. so it does have similar performance as the S&P 500 Index (individual years have gains generally about a percent or so less than the S&P 500 Index).

Capitalization classes are about the company's total value of their public stock shares, generally about like this:
  Small-cap is $250 Million to $2 Billion companies (excluding smaller companies).
  Mid-cap is $2 Billion to $10 Billion companies.
  Large-cap is $10 Billion or more.
Currently, the smallest of the S&P 500 is about $16 Billion capitalization. The three largest S&P 500 companies are about $3 Trillion each.

The Dow Jones Industrial Index is the major index most habitually reported by the news media. It represents 30 selected US stocks (all 30 are in the S&P 500). There are also other Dow Jones indexes, for example, this Industrial index does not include Transportation or Utilities, etc.

The Dow Jones Index is weighted by share price (NOT equally weighted, but IS NOT capitalization), meaning the stock with the highest share price affects the index the most, regardless of total capitalization. But comparing share price has no meaning without knowing value of the total dollars involved, so (shares x price) is how capitalization works. Dow Jones also depends on arbitrary weighting to try to give it actual meaning about the total market. That might have been convenient when it started in 1896 (when there were no computers to compute it), however stock splits seriously complicate this obsolete system now. The Dow Jones index is adjusted for stock splits, but with arbitrary choices and mysterious methods trying to make these 30 companies represent the whole market.

For example, United Health is Dow Jones number 1 or sometimes 2 weighted (varies, with 8.4% weighting, but is only #13 wtih 1.16% weighting in the S&P 500 Index). In the Dow Jones, United Health is made stronger than Nvidia or Apple or Microsoft (which are #1,#2 and 3 in S&P 500 but are #21, 3, or 15 (of 30) in Dow Jones (Nov 15 2024)). Nvidia was added to Dow Jones on 11/8/2024 as #22, but it is #1 on the S&P 500 Index, which meaning is puzzling?). These have split their share price several times, and I see no significance in the numbers 15 and 21. This mystery is said to adjust Dow Jones weighting somehow to represent the market as a whole. I must be too dumb to understand that, so my attention is to the S&P 500 Index. (See a Dow Jones list of stocks and the list of Dow Jones Weightings).

The S&P 500 Index represents the 500 largest public stocks in the U.S. market (503 tickers of 500 companies). It is weighted by capitalization, meaning a $1 price change in a $1 Trillion company has 100 times the effect in the Index as a $1 change in a $10 Billion company (due to the weighting, because that is where the money is). The S&P 500 Index is important because it contains near 80% of the total U.S. market capitalization (dollars).

Many consider the S&P 500 Index to be most representative of the overall market performance. The S&P 500 Index is diversified (among different industries) and has itself been a good investment bet long term).

The Nasdaq Composite Index is 2500 stocks in the NASDAQ exchange (all types, especially newer companies, including many of the largest companies, and many are also in the S&P 500). The Nasdaq is also 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 (ticker QQQ is one).

The Russell 2000 is 1947 Small-Caps, not the smallest, but those ranked 1001 to 3000 in size in the Russell 3000 (with similar purpose as the S&P 500, to represent the market). In Russell 2000, the Median size is $1 Billon, largest is $12.8 billion (just short of the S&P 500 requirement).

Stock Dividends are quite valuable long term, but dividends are NOT new income at the time, so withdrawing them is simply a withdrawal from your investment (which withdrawals are 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). There are groupings like 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. Or into the10 year history comparison of 140+ of the largest S&P 500 stocks and several others.

More General Market Details

Indexed funds vs. Actively Managed funds: Index funds simply try to match performance of the fund to the actual daily index of the indexed 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 with a larger fee cost trying to pick the best paying investments. Typically, most funds are conservative, meaning the hottest high flyer stocks are very tempting, but can be very volatile, often with large swings either up or down, and are generally higher risk, not often considered safe enough if you are not watching every minute.

It is commonly said that the passive indexed S&P 500 Index earnings beat active managers about 90% of the time (the lower fee is some part of it). That is speaking of active management of funds, and is NOT necessarily about individual stocks. Managers might accomplish the highest gains now and then, but next year may be rather different. There are of course individual stocks that may pay much more some of the time, but a fund generally has dozens of stocks, some of which may be great, and several others much less so.

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 bought and sold like stocks, any time the market is open, at the market price. That could be important if you trade frequently, but is less important if you buy and hold. And since ETF must trade whole stock shares, dividend reinvestment likely may not be available. One ETF 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 do 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, every year can add up big. Fees might be near zero on Index funds (stocks picked by computers, all stocks in the index, instead selected by human management). The large brokers with no commission will handle your trade, probably only online, but don't expect advice there on what to buy. Those earning commission may offer more advice, but they might be more interested in their commission than your benefit (they have lists of what to sell today because of their cut). 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.

A low fee is a factor of higher gain. Many consider the S&P 500 Index to be most representative of the overall market performance. Most index funds typically have a very low fee, and the S&P 500 Index is somewhat diversified and is a good bet long term. Be aware there is a market saying that trying to time the market is a fool's 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 entirely diversified. The "Magnificent Seven" of the S&P 500 (Apple, Microsoft, Amazon, Nvidia, Alphabet, Meta Platforms, and Tesla) have accounted for about 27% of the S&P 500 results (but is 7/503 = 1.4% by count).

The hot stock downside is that the 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. It is true that the faster they grow, the faster they can fall. Any bad news will be a large fall. Buying the low dips is a major market plan, but buying on bad news can be a bad idea, as it may make the loss real and permanent. A good stock will likely recover, eventually. The leading stocks can fall the most, and then come back the strongest. The past year 2022 was a very bad year, the S&P 500 bottom was -25%. 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, Check 2022).

But the good stocks always recover, eventually, and 2023 did much better, not quite full recovery until 2024, but much better (and these growth leaders were 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, utilities, transportation, 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., which may or may not interest you).

A S&P 500 Index fund earns more than balanced funds ("balanced" means the fund is 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 five year gain from 1970 was down 12.4%. The entire 2000 decade was down -9.5% 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 millennia older. 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).

Companies can go out of business (to zero stock value), but never withdrawing anything will not go below 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.

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 still about 3.0%, 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 many years of compounding are the best tool, don't waste them by waiting.

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.

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. But do understand that it is very normal to go up and down every day. Another page shows six 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).

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. Until 19 Jan 2024, 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 did better, at least for the large growth stocks, but it's still a ways to go to full recovery. Then after two years, the next record high was recent, 19 Jan 2024 at 4839.81, 0.9% higher.

The 2001 and 2008 dips had bottoms at -50%, and the entire 2000-2009 decade lost 9.5%. It was bad, but it fully recovered by 2013. The 2020 pandemic dip was deep (-34%) but relatively short duration.

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).

How Often Should You Expect a Stock Market Correction? reports that since 1928, on average, the S&P 500 has experienced:

• a correction once every 2 years (10%+)
• a bear market once every 7 years (20%+)
• a crash once every 12 years (30%+)

It happens, and then it recovers. So hang in there. That's the meaning of "Buy and Hold". The market goes up and down, most of the time up. And the years are your best investment tool.

And the few worst past ones have reached 50% down. It happens, and then it recovers, always has. The 2020 pandemic dropped the market 34% in March, quite bad but short. It fully recovered 100% quickly by August, and then 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, always has.

Recessions: The definition of a recession is about the decline of national GDP growth and the rise of unemployment. Recessions are NOT necessarily 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 such as 4% withdrawals. Because how long a fund can survive retirement withdrawals in bad times actually depends on how much money it still makes available. It's important to realize 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 will 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 2024 is two years since the previous record high of the S&P 500 Index (and the S&P 500 low on 30 Sept 2022 reached -25%, and still about -18% 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 recovery of good investments after bad market 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).

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 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, the market might be down. That's not comfortable, and a 100% recovery might not still 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 after it starts. And retirement is possibly a 30 year duration, and growth continues all during that time. We don't know about the future, but the calculator 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. 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.

Also see these pages:

Next page: Withdrawing dividends is a poor investment plan

Compounding and Annualized Return % calculators

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