A Critical Difference: Investments in Middle versus Later Life

Retirement is a watershed event in many ways, not least of which because investments take on a fundamentally different role in a person’s life. The role change is important, yet it often goes unnoticed as new retirees involve themselves in deciding where to live or what trips they might like.

Nothing signifies the change better than the activity with investment accounts: during middle life, workers regularly add to their investments, and during later life, they withdraw. A good way to illustrate the importance of the change is to compare the performance of investment portfolios during 11 years of work versus 11 years of retirement.

Middle versus Later Life

In middle life, investments seem to sit on the sidelines. Working persons often set up regular deposits and sometimes read the quarterly statements, taking comfort in the idea that if trouble arises, money is there. Still, the investments are not playing in the daily scrimmage of work and family. As they rise and fall with stocks and bonds, family life moves along, funded by the incomes of the working adults.

Retirement changes that pattern, and investments move into daily life as needed sources of income.

The change from work to retirement can be analyzed with our six-step investment model. (See the Appendix at the bottom of this writing for links to blog posts explaining the model.) During work, regular deposits are added to the investments in the model, and during retirement regular withdrawals are subtracted from the investments. We have been using data from the most recent 11-year period, from the end of 2000 through the end of 2011.

In the six-step model, a person starts the period with investments split 50/50 between stocks and bonds, and rebalances the portfolio annually. (See Appendix links one and two for an explanation of rebalancing.) The investments are Vanguard Total Stock Market Index Fund Investor Shares, and the Vanguard Total bond market Index Fund Investor Shares.

Model Results 

The table below shows results. The first row illustrates retirement, with the same results described in Appendix link three. A retiree with $100 of investments withdraws $4 annually for the 11 years, and ends with $106. That result is good—after 11 years the portfolio is larger, and a retiree is well positioned to continue through retirement.

The rest of the table illustrates portfolios of workers who make regular deposits. Readers might think of watching several people, each represented by a row in the table, live through 200 to 2011: one person is retired, and the others are working. At the end, we compare the values of their investments.

The second row, representing the first hypothetical worker, shows that annual deposits of $4, instead of withdrawals, give an ending value of $223, or more than double the initial value. Similarly, rows three and four show ending values for higher levels of annual deposits.

The annual deposits can be thought of as 10% of a salary. Rows two, three, and four would then describe annual salaries of $40, $70, and $100, or if scaled up, to $40,000, $70,000, and $100,000. As the annual deposit increases, the end values increase too. Consistent saving matters.

Results are also shown for people starting the period with larger portfolios of $200 and $300, and making a $7 annual contribution. These people are richer and regular contributions help them achieve even more end value. Row six, for example, describes a worker making $70,000 per year and saving $7,000. She started the period with $300,000 and ended with $596,000.

The main point, however, concerns the dramatic effect retirement has on portfolio dynamics. Switching from a modest annual saving to a modest annual withdrawal (4% of initial value) greatly dims the prospects of further accumulation. In middle life, modest annual contributions keep portfolios growing fast, lulling people into a false set of expectations about their investments. Once withdrawals begin, investment growth is much less certain. The retiree in row one ended the period with close to what she had at the start, whereas all the workers ended with substantially more.

The discussion here counsels prudence. A wise worker prepares herself for retirement by practicing a level of fiscal discipline that may well have been unknown during middle life. If she loses control and spends too much of her portfolio in any one or two years, there may be few opportunities to regain lost ground.


A six-step model for managing investments in retirement is described in three previous posts:

  1. How to Make Retirement Investments Last
  2. The 6-Step Investment Model Worked
  3. How to Make the 6-Step Investment Model Work Better

One thought on “A Critical Difference: Investments in Middle versus Later Life

  1. Pingback: Invest in REITs As Well As Stocks and Bonds | Later Living

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