Case Study #2: Long-Term Impact of a Bear Market

Here’s the case of a 60-year-old couple who has just started their retirement while planning to live off their investments for the next 35 years.  No sooner do they begin their retirement than the coronavirus pandemic strikes and the market plummets.  They have $1,000,000 in tax-deferred savings, $100,000 in taxable savings ($25,000 of which is unrealized capital gains) and $100,000 in cash, and $50,000 in annual expenses. Their combined Social Security benefits at their full retirement age of 67 is $24,000.

In this analysis we want to use PRC Gold to investigate the long-term prognosis of this couple’s financial future.  Let’s assume inflation will be steady at 3%, the money in taxable and tax-deferred accounts is invested equally in stocks and bonds and that the market going forward behaves exactly as it did beginning in 1929.

Fortunately, this couple has two years of expenses in cash so they don’t have to make withdrawals from either taxable or tax-deferred savings immediately.  When this money runs out in two years they’ll both be 62 and will have the option of starting their Social Security benefits to offset about half of their annual expenses, and the rest will have to be taken from taxable or tax-deferred savings.  We’ll set up an optimized withdrawal order such that PRC will model withdrawals from tax-deferred savings up to the amount of the standard deduction and any additional withdrawals that are required will be taken from taxable savings.

Now we’ll use PRC’s Bear Market Analysis feature to examine three projections of the future.  All three cases are identical with the exception of Social Security start ages.  In the first case, the couple will take benefits starting at age 62 to minimize withdrawals in the early years.  Here’s the result:


In the second case, the couple will take benefits at age 67.  Here’s the result:


In the third case, the couple will delay benefits until age 70.  Here the result:


In every case, the couple’s savings takes a major hit due to the bear market but none of them run out of money over a 35-year period.  Further, despite the larger initial draw-downs due to waiting longer to start Social Security benefits, the longer they wait to start their benefits the better off they are in the long run!

What are the unique features of PRC Gold that enable this analysis?

  • The ability to model withdrawal order per user preference
  • The ability to model different Social Security start ages with the corresponding effect on the benefit amount
  • The ability to model an historic or a customized bear market

Pralana Consulting LLC, Plano, TX

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