I just finished the book “Unveiling the Retirement Myth Advanced Retirement Planning Based on Market History” by Jim C. Otar. Jim is a financial planner from Toronto, and based on the sheer volume of calculations and models in this book, some kind of rain-man. This is without a doubt one of the most thorough, detailed, researched, and interesting retirement books I have ever read.
You can still pick up a free copy over at FiveCentNickel and elsewhere, and I would recommend that you do. In the book, Otar debunks standard retirement planning calculators, and shows how much luck influences your overall returns as well as the longevity of your retirement portfolio.
In an effort to condense the over 500 pages of this book, I just wanted to highlight what I feel is the most important information that many readers may not be familiar with.
Sequence of Returns and Reverse Dollar Cost Averaging
One of the most important factors in the longevity of your retirement portfolio is the sequence of returns. If you happen to retire during the beginning of a bullish stock market cycle, you will be rewarded with life-long income. Examples of bull markets are the early 1920’s, early 1950’s or late 1970’s.
If, on the other hand, you have the bad luck of retiring at the beginning of a bearish cycle, say the early 1930’s, late 1950’s, early 1970’s, or early 2000’s, those beginning years of losses will significantly decrease the life of your portfolio, and increase the probability that you will run out of money prematurely.
There are two reasons for this. First, a drop in asset value requires a larger gain to return to the initial balance. This may sound confusing, so here is an example. If your $100 investment loses 25%, it’s now worth $75. If your $75 then has a 25% gain, the value is $93.75. In order to get back to your $100 initial investment, you need a 33% gain. A larger gain is needed to recover from a smaller loss.
If your portfolio has a loss in the first few years, it will require a larger gain to return to its initial value. Since markets in general tend to drop sharply, then recover over longer periods of time, a negative first two years may take another 3-5 to return to pre-crash value. And if you are selling shares during this time, in order to provide income, your losses are magnified by reverse dollar cost averaging.
Reverse Dollar Cost Averaging works in exactly the opposite way of Dollar Cost Averaging. When you are taking periodic withdrawals from a retirement account, and you sell your shares during a bear market, you receive less money per share, and must sell more shares to maintain your desired income. Once those shares are gone, they cannot participate in the recovery, and your loss is permanent. The combined forces of a poor sequence of returns and reverse dollar cost averaging can wreak havoc on a retirement portfolio.
The book goes into much further detail on various topics, from inflation to dividends to optimum asset allocation and sustainable withdrawal rates. He even presents different models based on different stock indexes, such as the American, Canadian, and Australian. It can at times become a bit dry, but it’s easy to skip the equations and focus solely on the text.
I highly recommend you take the time to at least skim this book, as it’s filled with useful information. If you do, feel free to let me know what you thought about it. I’m interested to see what others have to say. Best of Luck