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Originally Posted by chassis
VertigoAtHome I see how your example works and the math holds water. And it is cherry picking a time period to look for the perfect storm.
When picking the perfect storm, it is reasonable to pick the average American in 1968. Defined benefit pensions were far more common, so on average the hypothetical 65 year old in 1968 would have pension income, in addition to Social Security income, to reduce the portfolio withdrawal rate. Employer-sponsored retiree health coverage was also more common, reducing out of pocket healthcare expense. Add to this the self-regulating behavior of an individual's spending patterns as net worth ebbs and flows.
We agree that equities are, in general, the best place to invest for the medium and long term, during almost any economic scenario.
I take issue when people on threads like this open the dark closet and bring out the 1970s Inflation Zombie. That zombie wasn't scary then, and shouldn't be scare now, because of the data you presented on equity and bond returns during that period.
Side topic - think about the benefit to Federal tax revenue from RMDs, related to growing retiree assets. It almost seems like aligned objectives between the government and investors. Investors who are also taxpayers. The more money a retiree has in their tax-advantaged retirement accounts because of market appreciation, the more RMD-related tax revenue Uncle Sam gets. I think this is close to a win-win. Therefore the Federal government seems likely to implement policy measures generally supportive of financial asset growth.
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I’m going to disagree on a couple of points. While you are correct about DB and medical plans at the end of the 1960s, the problem many retirees encountered in the 1970s is that the payouts did not have inflation protection (not indexed), so those fixed annual annuity payments lost substantial purchasing power. This was a real problem at the time, and a significant factor behind California’s Proposition 13 (prop tax limitations). At the time social security payments were not indexed to inflation either, and income tax brackets were not indexed (as they still are not), so inflation lowered purchasing power, did not raise retirement income for those without a portfolio, and did raise taxes for those with a portfolio.
Also, the RMD argument ignores that a lot of the return in an IRA/401(k) is capital gain, but it is taxed at distribution as ordinary income. As a taxpayer, I don’t consider that a win-win, especially given that the RMD increases with portfolio size, pushing the investor into a higher tax bracket once again. To me it looks like inflation favors the federal government and not the retiree.
So the 1970s inflation was scary for a lot of people, especially anyone on a fixed income. Today some fixed incomes are indexed (social security) and some are not (many DB plans, annuities). So it might not be as traumatic as the 1970s but still something to try to guard against if in the fixed income category (and the inflation scenario).
On the positive side, anyone who got into a house or other real estate before the early 1970s could ride that wave (in many markets, I’m sure there were local areas where there wasn’t enough appreciation to cover the carry and transaction costs).