Nestegg Cycle © The Art of Engineered Crash Protection, P1
Posting Date: July.27, 2025 By: Fred P Davidson, Founder of NesteggCycle.com
INTRODUCTION:
You arrive at retirement with
some quantity of invested and investable assets you have managed to accumulate.
Possibly for the past several years, you have been guessing at what you can afford
to spend, by applying William Bengen's "4% Rule" -- you divide your assets by 25. On a million dollars,
that becomes a starting guess of 40,000 per year that you can spend. But how good of an estimate
is this really for you in particular? And how safe is it against a possible market crash?
Now suppose you realize that the lifestyle you'd dreamed of, requires 45,000 per year.
Can you do it at all? Can you do it SAFELY?
What about 50,000? More?
In this series, we'll show how to navigate these questions.
The answers will depend on your particulars:
Your expected payout period or Term; if longer than 30 years, your safe payout will be less!
Your portfolio: is it more volatile than the 50/50 mix of stocks and bonds used in Bengen's study?
Your NET average yield (meaning: after adjustment for inflation):
is it more or less than the 4.5631% yield used in Bengen's study?
Your access to other resources, if any, beyond this portfolio.
Our basic concept: a quantity of uninvested cash -- sometimes surprisingly modest --
we'll call it a Cash Reserve --
can substantially increase a portfolio's crash-worthiness,
and we will demonstrate the tools and techniques to design, or to "engineer",
a portfolio to any specified degree of such crash-worthiness,
as expressed by ability to withstand, unharmed,
a market depressed (crashed) to a given percentage of the original value,
for a specified amount of time.
Your personal resource limitations might restrict your ability to apply these techniques!
This author previously focused on a 3 year crash test standard, but protection against a "lost decade"
turns out to be even more crucial: a long stretch of years with no growth, or less-than-expected growth,
can be more damaging to your portfolio, than a sharply dropped market which recovers in a few years!
In this posting, Part 1 of a series, we will examine the "lost decade" phenomenon and its defense, in detail.
CAUTION! Understand that this technique designs toward surviving a specified market shortfall.
This is as defined above at "Our basic concept".
This is NOT the same thing as a probability of success or failure!!
We repeat for emphasis:
This is NOT the same thing as a probability of success or failure!!
Thanks to
William Bengen's extensive historical study of safe withdrawal rates, done in 1994,
for 30 year retirements (NOT longer! NOT valid for early retirements!)
and for a specific mix of investments,
50% US common stocks, and 50% US Intermediate Treasuries, rebalanced continually;
we do have some real-world data about what can be safely spent
WHEN INVESTED STRICTLY AS SPECIFIED.
For basic background about Crash-Points, please see:
THIS HELP PAGE
For deeper background about Crash-Points, including derivation of the equations,
our specialized definition of a Crash, our important case of the "Crash to 100%",
and our DISCLAIMERS, please see:
THIS ARTICLE
Links to Crash-Point (CP) "SOLVER" tools:
SOLVE_target_CP1_payout
SOLVE_target_CP2_reserve
For our entire body of material on this website, please see:
ARTICLES AND CALCULATORS
Inquiries, Issues, Suggestions: info@nesteggcycle.com © 2020-2025
DISCUSSION: Payouts that could survive a "lost decade"
What do we mean by a "lost decade", and are there any examples in modern history?
Simply put, we mean an extended period of about ten years or longer, in which securities
prices, and thus your retirement nestegg, does not grow.
However, our research shows that oversized payouts can cause portfolio damage
in much less than 10 flat years, so we have extended the concept down to 3 flat years.
Japan's Lost Decades
Broadly impacting the entire Japanese economy, over the period of 1995 to 2023,
the country's nominal GDP fell from $5.33 trillion to $4.21 trillion,
real wages fell around 11%, while the country experienced a stagnant or decreasing price level.
America's Lost Decade and Other Crashes
From Jan 2000 - Dec 2009, the S_and_P_500 index, which normally delivered about 10%/year,
earned NEGATIVE 0.95%/year ...
While other parts of the market -- value stocks and emerging markets -- did quite well.
We will use the
SOLVE_target_CP2_reserve
tool for the rest of this section.
We'll show a wide range of results in the following table.
Each calculation assumes: start with 1 million; 30 yr retirement term; market earns net 4.5631% (when not flat!)
The "flatness" is handled as a Target Crash-Point = 1.000, otherwise known as a "Crash to 100%".
And the length of the flat period is shown as a number of years ranging from 3.0 to 20.0
"Cost of Remediation" Table for "Lost Decade" payout scenarios:
Column headers: number of "flat" years (crashed to 100%), a no-growth period of time, 3 to 20 years
Rows: annual payout, meant as 4.0% - 7.0% on a nestegg of one million.
Each data point is the percentage of extra money needed in a Cash Reserve to survive this condition
(which may never happen -- so degree of safety is a personal judgement call!)
3.0 5.0 8.0 10.0 12.5 15.0 20.0
Payout ------ ------ ----- ----- ----- ----- -----
40000 0 0 0 0 0 2.77 11.55
45000 0 0 0 3.22 9.70 15.62 25.50
50000 0 0 8.52 14.69 21.89 28.47 39.44
55000 0.90 8.53 19.37 26.15 34.08 41.31 53.39
60000 10.07 18.39 30.22 37.62 46.27 54.16 67.33
[ 61848 -- annuity maximum theoretical payout for 30 years, at steady net yield of 4.5631% ]
65000 19.25 28.26 41.07 49.09 58.45 67.01 81.27
70000 28.42 38.13 51.93 60.56 70.64 79.85 95.22
Some observations based on the above table:
The ZERO entries are perfectly fine as-is.
They are clustered in the upper left portion of the table,
and do NOT require any cash reserve to be secure.
As we move rightward and downward through the table, this increasing remediation cost
shows that we are moving farther away from self sufficiency,
and toward the need for more help from funds beyond the invested portfolio.
Consider as a minimum requirement,
the ability to survive the first 5 years of retirement payouts with no growth.
By this (weak) standard, we are completely fine at 40K, 45K and 50K, while 55K needs an 8.53% cash reserve.
In fact, per Table A in the next section, the maximum payout that works for 5 flat years is: 50678
As we will shortly see, some retirees will need to be able to handle a flat period considerably longer than 5 years!
A 50K payout for 8 flat years, or a 55K payout for 5 flat years, require essentially the same reserve: 8.52 or 8.53%.
To survive a full decade, ten flat years, the 40K payout is still fine, while 45K needs a little help: 3.22% cash reserve.
A 50K payout would require substantial help, namely a reserve of 14.69%.
Is it sufficient to be protected against ten flat years? Actually, NO, NOT always!
Here is our Real-World Hook into What Works Historically:
Bill Bengen's finding of 41.5K (4.15%) as the safe maximum payout in the worst case actually seen,
was indeed the equivalent of a flat stretch longer than 10 years: 11.995 years. We'll round it to 12 years.
This worst-case was a retirement begun in 1968, almost 40 years after the Great Depression.
Thus, the stagflation of the 1970's did more portfolio damage than the Great Depression!
Worth mentioning for payouts of 61.85K and Up:
Under our specified conditions, the largest annual payout that can be supported is: 61848
Thus it should come as no great surprise that the 65K and 70K payouts need assistance from a cash reserve
starting on Day One, even when performance is normal:
for 65K: needs 5.09% reserve immediately
for 70K: needs 13.18% reserve immediately
IF you've got the cash, there is no limit to the payout you could support:
For instance, a 100K payout could be generated by supplying a cash reserve of 61.69% to get started,
but if you also wanted protection against 12 flat years you need a 140.99% reserve: 1410K in extra cash!
More ways to Visualize Impacts of a "Lost Decade"
The "Cost of Remediation" table above was relatively easy to produce, since each data point required only ONE run of the CP2 solver tool.
But below, each data point required about 7 to 10 iterations of this same tool until a "close-enough" answer was obtained.
For all three, A, B, C: Term is 30 years.
For A and B only: Net Yield is Bengen's 4.5631%
A1: Maximum payouts at ZERO reserve ...
Various lengths of the "lost decade" in years
3.0 5.0 8.0 10.0 12.0 12.5 15.0 20.0
------ ------ ----- ----- ----- ----- ----- -----
54509 50678 46075 43596 41495 41021 38921 35857
A2: Three-year Crash-Points at same payouts as above:
1.000 0.6839 0.4718 0.3951 0.3427 0.3322 0.2899 0.2392
B: Number of flat years survivable
40K - 60K payouts:
40K 45K 50K 55K 60K
13.652 8.827 5.395 2.768 0.673
C: Net Yields required to survive 12.5 flat years
40K - 60K payouts:
40K 45K 50K 55K 60K
3.914 7.277 11.279 16.358 x
-------------------------------------------------------------
For charts B and C,
There is no point in even calculating results above 55 or 60K
These charts highlight the finding that survivability declines sharply with:
increasing payout.
increasing length of the flat (no-growth) period.
Charts A1 and A2 show the relationship between the protections for:
A1: Long term non-performance, and
A2: Shorter term sharp market drops.
You don't have a viable payout plan
unless you
have sufficient cash elsewhere,
for the cost to fix, or remediate, the more extreme scenarios,
should they occur.
The 4.15% safe maximum payout is the point where your need for a cash reserve is eliminated.
This can never be unconditionally guaranteed. It is NOT a law of nature.
But it DOES reflect 50 years of carefully analyzed, recent investment experience.
WRAP-UP: Pulling this all together
All of this may still seem a bit abstract, so now let us bring it down to earth.
Consider four new retirees.
All have the identical 1 million dollar portfolio we've been describing,
but different quantities of resources beyond that:
None; 25% (250K); 50% (500K); 75% (750K).
How much payout can each retiree take with complete safety -- protected to 12 flat years?
NOTE: 12 flat years is the worst-case scenario encountered in Bengen's 1994 study.
How much can each retiree take with some exposure to risk -- protected to 9 or 6 flat years?
RESERV: 12 yr 9 yr 6 yr
---- ----- ----- -----
None 41.5K 44.8K 49.0K
25% 51.9K 56.0K 61.3K
50% 62.2K 67.2K 73.5K
75% 72.5K 78.4K 85.8K
FUTURE TOPICS for this Engineered Crash Protection series:
We hope to produce postings covering such matters as:
How/when to take payments from the Cash Reserve, and in What Amount?
Iso-Sippies (Scenarios with same CP) & Iso-Fixies (Scenarios with same Cost to Fix or Remediate)
Special cases, tips and tricks.
Tools we'd still like to design and build.