Recession-Proof Your Retirement Savings -- Part 2

Last Updated Jul 9, 2010 9:27 AM EDT

My previous post described one way to recession-proof your retirement savings, by drawing down just interest and dividends from a portfolio balanced between stocks and bonds. Now let's see how you might have fared if you had used this strategy during the "lost" decade of 2000 to 2009.

There are two simple, cost-effective ways for you to meet the asset allocation guidelines described in my previous post. You can invest in either:
  • Vanguard's Wellington fund (VWELX), invested roughly two-thirds in stocks and the rest in bonds, or
  • Vanguard's Wellesley fund (VWINX), invested roughly one-third in stocks and two-thirds in bonds.
Let's see how you would have fared if you had invested $200,000 in each of these funds at the beginning of 2000, and you withdrew just interest and dividends each year through the end of 2009.

Vanguard Wellington Fund
By the end of the decade, your initial investment of $200,000 would have grown to $209,210, just on the appreciation of the fund's share price, for a modest gain of 4.6% over 10 years. During 2000, your first year, your interest and dividend payments would have been $7,739, for a yield on investment income of 3.9%. Over the decade, you would have received a stream of income with a modest roller-coaster ride, as shown by this graph.

Vanguard Wellington Income
Throughout the decade, you would have also received $53,002 of capital gains distributions. You could have used these distributions to boost your retirement savings at the end of the decade, or to fill in the dips in the dividend income stream, or some combination thereof.

By the way, if the 2009 dollar amounts of the fund's dividends and interest payments are repeated in 2010, you'd realize an annual yield of 3.1%, based on the fund's price at the beginning of 2010.

Vanguard Wellesley Fund
By the end of the decade, your initial investment of $200,000 would have grown to $219,032, just on the appreciation of the fund's share price, for a modest gain of 9.5% over 10 years. During 2000, your first year, your interest and dividend payments would have been $11,398, for a yield on investment income of 5.7%. Over the decade, you would have received a fairly steady stream of income, with a less volatile roller-coaster ride compared to the Wellington fund, as shown by this graph.

Vanguard Wellesley Income
Throughout the decade, you would have also received $31,559 of capital gains distributions.

Once again, if the 2009 dollar amounts of the fund's dividends and interest payments are repeated in 2010, you'd realize an annual yield of 4.4%, based on the fund's price at the beginning of 2010.

When you compare the performance of these two funds, the underlying asset allocation of these two funds explains the results. The Wellesley fund has a higher allocation to bonds than the Wellington fund. This is the reason for the higher amount of income for that fund, and the reduced volatility in the stream of investment income over the decade.

More importantly, just think about the results for either fund. If you had invested in either one of these funds and lived off the income stream, you would have survived one of the worst decades for investing with a relatively steady stream of income and your retirement savings intact. Many retirement investors fared a lot worse.

During a market crash, your goal is to survive. It's unrealistic to expect significant growth in your retirement savings. The very simple investment and drawdown strategy described in this post would have enabled you to survive not one, but two stock market crashes. You wouldn't have been wiped out, and you wouldn't have needed to make drastic changes in your life. Not bad!

You can learn about other strategies to help protect your retirement security during economic downturns with my book, Recession-Proof Your Retirement Years: Simple Retirement Planning Strategies That Work Through Thick or Thin.
More on CBS MoneyWatch
Recession-Proof Your Retirement Savings -- Part 1
The Stock Market - One Year After Armageddon
Asset Allocation: My Grandfather Had It Right
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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