A Case Study in Sequence Risk: A 20-Year Retrospective on the Impact of the 2000–2002 and 2007–2009 Bear Markets on Retirement Nest Egg Sustainability

42 Pages Posted: 23 Apr 2021

See all articles by Jack De Jong

Jack De Jong

Nova Southeastern University

John Robinson

Financial Planning Hawaii

Date Written: April 22, 2021

Abstract

The first decade of the 2000s saw two prolonged bear markets both of which produced declines of over 50% in value in the S&P 500 Index from peak to trough. In total, the 10-year period from March 1999 through February 2009 saw the stock market lose more than 30 percent of its value. This period represented the worst decade for the U.S. stock market since the Great Depression. For consumers who had the misfortune of retiring in 1999, this “lost decade” embodied the definition of sequence of returns risk. Researchers at the time could only speculate as to the impact such sharply negative returns might have on the long-term sustainability of retiree spending portfolios.

With a full twenty years of monthly return data now in the books, this paper offers a case study on the impact of sequence risk. Specifically, we quantify how retiree portfolios may be fairing today and compare the relative success or failure of commonly promoted glidepath and allocation spending strategies. We conclude that the lost decade is indeed a nightmarish case study in sequence risk and that much of the conventional planning wisdom, including the vaunted “4% Rule,” failed investors during this period. Our analysis has important implications on how financial advisors and their clients should approach portfolio sustainability in the current historic low yield investment environment.

Keywords: Sequence Risk, Retirement Income Sustainability, Retirement Portfolio

JEL Classification: G11, G29

Suggested Citation

De Jong, Jack and Robinson, John, A Case Study in Sequence Risk: A 20-Year Retrospective on the Impact of the 2000–2002 and 2007–2009 Bear Markets on Retirement Nest Egg Sustainability (April 22, 2021). Available at SSRN: https://ssrn.com/abstract=3832165 or http://dx.doi.org/10.2139/ssrn.3832165

Jack De Jong (Contact Author)

Nova Southeastern University ( email )

3301 College Avenue
Ft. Lauderdale, FL 33314
United States
808-387-2027 (Phone)

John Robinson

Financial Planning Hawaii ( email )

677 Ala Moana Boulevard, Suite 605
Honolulu, HI 96813
United States

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