Before 1922, 90% of people who developed Type 1 diabetes were dead within five years. In 1918, Elizabeth Hughes—the 11-year-old daughter of Charles Evans Hughes, a future Supreme Court Justice—received a diabetes diagnosis. She weighed 75 pounds. By 1922, she weighed 45 pounds and was incapacitated.
She traveled to the University of Toronto for insulin therapy, a novel treatment developed by scientists in Europe and North America, most notably Canada’s Frederick Banting and Charles Best. She gained weight. She grew taller. Her energy and mobility returned.*
Elizabeth Hughes Gossett died 60 years later, the spouse of Ford Motor Company’s general counsel, the mother of three children, and a prominent figure in Birmingham, Michigan.
Her story is a chapter in a miraculous medical chronicle that includes the discovery of antibiotics; the invention of the polio vaccine; and the development of antiretroviral therapy for HIV.
It’s also a commonplace, an illustration of Ecclesiastes’ observation that “time and chance happeneth to us all.” The difference of years, months, and even days has a dramatic impact on outcomes in every part of our life.
Timing–and luck–is everything.
Health and wealth
The role of luck is especially visible, if less consequential, as we save for, and spend in, retirement. Even if two people save the same amount during their working years, their accumulated assets vary based on the patterns of return in the financial markets.
An illustration:
- Rackle saves $10,000 per year for 25 years. During that period, financial market returns rise by a percentage point annually, from -10% in the first year to 14% in the 25th, a compound annual return of 1.7%.
- Sometime in the future, Rackle Jr. saves the same $10,000 per year for 25 years. He experiences the same returns, but in the opposite order. His first-year return is 14%; his 25th is -10%, again a compound annual return of 1.7%.
- Rackle and Rackle Jr. both put away a total of $250,000. But they finish the 25-year periods with different asset values, as displayed in the chart below.
Rackle earns poor returns in the early years, when his accumulated savings are modest. He earns high returns near the end of the 25-year period, when his savings are substantial. Rackle Jr. experiences the opposite: high returns at the start, ugly at the end.
This reversal produces a difference in wealth of more than $200,000.
When we save, the ideal scenario is to suffer poor returns in the early years and earn strong returns in the later years, consistent with the Wall Street imperative to “buy low, sell high.”
But when we spend, the ideal scenario is the opposite. A second illustration:
- Rackle retires with a $500,000 portfolio. He hopes to spend 4% of the portfolio’s initial value–$20,000—each year for the next 25 years. As in the first illustration, his annual returns rise by a percentage point annually, from -10% in the first year to 14% in the 25th, a compound annual return 0f 1.7%.
- By retirement, the ill-fated Rackle Jr. has somehow scraped together $500,000. He too plans to spend $20,000 a year for the next 25 years. He experiences the same returns as Rackle, but in the opposite order. His first-year return is 14%; his 25th is -10%, a compound annual return of 1.7%
- Rackle and Rackle Jr. start their retirements with the same $500,000 portfolio. Their financial fates are different, as displayed in the chart below.
Rackle withdraws $20,000 per year even as poor returns in the first years of retirement reduce his portfolio’s value. He spends his last $1 after about 16 years. Rackle Jr. withdraws $20,000 per year as early returns boost his portfolio’s value. After 16 years of $20,000 withdrawals, Rackle Jr. sits on almost $900,000.
An empirical investigation into generational luck
Both examples illustrate the importance of the sequence of returns and its contrasting implications for savers and spenders.
Both illustrations are hypothetical. I use stock and bond returns from 1928 to 2022 to gauge the difference between saving and spending in the best and worst of times. I assume that retirement savers put away $10,000 per year for 30 years.
I assume that spenders start with a $500,000 portfolio and withdraw $25,000 per year, increasing withdrawals by the annual inflation rate over the next 30 years. (That withdrawal exceeds the $20,000 withdrawal in my hypothetical illustration, but, hey, let’s live a little.)
The first 30-year series begins in 1928, the second in 1929, and so on. I calculate the results for both savers and spenders using a portfolio split evenly between U.S. stocks and bonds. I adjust the values for inflation, meaning you can interpret the results in today’s dollars.
The best and worst times to save
The empirical results are consistent with the hypothetical illustrations. The best time to invest $10,000 per year in stocks and bonds was 1970, when financial market returns and expectations about the U.S. economic future were bleak.
Stock, bond, and other asset prices tumbled as inflation and unemployment surged. This combination added a new word to the economic lexicon: “stagflation.” But anyone able to invest during this period acquired stocks, bonds, and real estate at low prices. As U.S. policymakers and business executives responded to the humiliations of the 1970s and early 1980s, investment returns improved.
The worst time to save was 1952. Investment returns surged through the 1950s and early 1960s, but then collapsed as inflation raged and economic growth stagnated. These savers began to put away savings when the U.S. economic and investment future seemed bright. Their savings ceased when it turned dark.
The best and worst time to spend
The spending analysis is consistent with Rackle’s and Rackle Jr.’s hypothetical illustrations. The best time to spend from a portfolio is when the future is bright.
In 1969, as inflation surged and Detroit, Chicago, and New York City burned, asset returns collapsed, and inflation surged. It was a bad time to retire. Those who hoped to spend an inflation-adjusted 5% from their savings probably ran out of money within 20 or 25 years. Their early-1980s counterparts experienced a more rewarding reality. They retired when stocks, bonds, and real estate touched apocalyptic lows, then spent from their savings as the prices of these assets rallied.
Managing luck and uncertainty
How can we cope with generational luck and other forces beyond our control? I once interviewed mathematician John Allen Paulos. He recast Ecclesiastes for the secular age: “Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security.”**
Research suggests three tactical suggestions for living with this uncertainty and insecurity:
- Diversification. A mix of assets (stocks, bonds, and real estate) and a mix of income sources (investment earnings, part-time work, guaranteed income such as Social Security, pensions, and perhaps annuities) protect us against the worst outcomes in any investment or income source while allowing us to participate in the best.
- Flexibility. Vanguard research demonstrates that retirees who can afford to be flexible with their spending can preserve their assets through a long retirement. If we have the misfortune to retire as stock and bond returns tumble, we can safeguard our retirements by withdrawing a little less than our initial plans for a few years–less grocery shopping at Whole Foods, more at Aldi.
- Equanimity. At some point, our savings will experience a setback. Our income sources will come under pressure. A commitment to diversification and flexibility can ensure that we won’t overreact to these challenges with radical changes to sensible long-term investment and retirement-income plans.
The future is uncertain. Timing and luck are everything. These tactics can help us contend with the vagaries.
–A. Clarke