In the graph below, the red/burgundy lines represent the yearly systematic withdrawals of $60K, compounded by the 2% annual inflation rate. These will always be negative. The blue bars represent the unrealized gains and losses of the account.
While usually stated in percentage terms, here we see gains and losses stated in terms that most people care about: dollars gained or dollars lost.
Finally, the gold line represents the value of the account.
Source: Zephyr StyleADVISOR & Swan Global Investments. Indices are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. The charts and graphs contained herein should not serve as the sole determining factor for making investment decisions.
When someone says the S&P 500 lost 37% in 2008, what does that really mean?
In the context of this scenario, the $312,352 losses in the account in 2008 represents over four years of spending. The three-year bear market of 2000-02 was arguably worse since it lasted longer and the market took longer to recover. The unrealized losses were $485,097 and withdrawals of $191,042 were taken out over those three years.
Although markets did rally between 2003 and 2007, the portfolio had been seriously impaired by the long bear market.
Is a bull market enough to cover these losses?
The above analysis is sobering. Please keep in mind that the current U.S. bull market is the second longest on record, and the S&P 500 is up over 308.5% since March 9, 2009 to August 6, 2018. However, if one were to look at the gold line through that period, it is essentially flat. From 2009 to 2017 the unrealized gains were $617,179 while withdrawals were $727,719.
Through this amazing bull market, the portfolio was essentially treading water.