The REAL ODD’s of the S&P 500 and why most 401k’s are failing to meet the retirement needs of American's......

Problem Solved - You need S&P 500 ODD's and Balance Tables!

The average account balances, posted by the leading 401k providers, demonstrate that accounts are not providing near enough for the retiree to be able to retire. Because of the low ODD’s of meeting these goals, the primary cause of failure is that expectations are being set “Unrealistically High” giving a false sense of security, therefore; there is no sense of urgency to make any necessary corrections or alternative plans. Unfortunately, you only get one chance, there are no “do-overs” after retiring, what you have is what you’ve got!

For years I have been working with S&P 500 data (in excel) to try and answer all the questions being asked by may clients and to try and help me to be able to help them set “real-world” expectations for their retirement goals. My spread sheets, over time, have grown into gigantic monstrosities, and have been very telling!

I have hundreds of specialized spreadsheets covering all sorts of financial and economic questions. The most evasive questions: “How much money do I need and how much will I have in my account when I retire?” and “will it be enough, so as not to run out before I pass?”

After years of creating spreadsheet, finally, success! I now have two tables – S&P 500 ODD’s and Balance Tables. My YouTube video at VLBusa explains this in detail in 30 minutes.

See it on YouTube titled: EXPOSED - REAL Odds of the S&P 500 - PART 1

Using the S&P 500 raw data (no dividends, splits or inflation corrections) from Yahoo Finance, covering all the trade days from Jan. 03, 1928 till now. Over 23,648 trading days covering 94.2 years, as of Feb. 15, 2022 and growing… I now have the count of how many times each percentage has appeared in multiple cycles of annual returns. A percentage is equal to it’s “Truncated” number in excel. For example, a 2% count is any percent from 2.00% to 2.99%, a 8% is 8.00% to 8.99% and so on.

I truncated 94 years of annual returns and counted all the times each one came up in 1 yr, 3 yr, 5 yr, 10 yr, 15 yr, 20 yr, 15 yr and 30 yr cycles. For example: a 10 yr cycles is counting all the hits in each 10 yr cycle, so in 94 yr of 10 yr cycles, they are 86 cycles.

So, in the ODD’s Table to the Right

A 7% (7.00% to 7.99%) return has occurred 4 times out of 86 cycles in 94 years. As you can see it also falls in the 34% chance band, however, the 7% has only happened 4.65% of the time. This is done with all the cycles listed above to create the ODD’s Table. Also note: at the bottom of this 10 year cycle table, that a 7% fixed rate return, beat the S&P 500 43 of 86 times and tied it 4 times, for a total 54.7% of the time without any market risk. On the other hand, the S&P 500 has beat the 7% fixed rate 39 of 86 times and tied it 4 times, for a total of 50% of the time and still has all of the market risk. The reason for the 50% to 54.7% above is the shared 4 “Ties”. Note: The S&P 500 returns for 10 year cycles, span from (-)5% at 3 occurrence and 3.49% chance… to a 16% at 1 occurrence with 1.16% chance. 10% occurring 11 times at 12.79% chance.

This being said, the “typical” way most advisors project “possible” future growth is to take the 25 or 30 year average of the S&P 500 to calculate the future value of an account. In 2021 the 25 year average is 9.29% which has happened only 5 times at 5.81% chance (34% band). Between the 3 Bands (38%, 34%, 28%) you have many possibilities at near the same chance! Example: the 9% has a 5.81% chance while (0% to 11% band) is at 38%, a (1% to 9% band) is at 34% and the ((-)5% to 16% band) is at 28%. This is why, as shown by Sand-pile Theory and Black Swans, you cannot forecast future growth. We need to set client expectations by explaining the real S&P 500’s ODD’s based on the client’s Time Horizon, then using a S&P 500 “Balance Table” for Growth.

In the Balance Table to the right of the ODD’s Table above, shows the account balance of $3,000 with $3,000 a year contribution FV (Excel formula) for each percentage. (assuming 401k or IRA, no fees). At the bottom you see Min/Max of $24,668 to $87,433 with an AVE of $50,664 (total contributions of $33,000.

Now let’s look at a basic Client / Advisor exchange

?A retiree age 45 wanting to retire at age 70 has a 25 year “time-horizon”. In 2021 the 25 year average S&P 500 is 9.29% and the average 401k in 2020 is $161,000 for age 45-54 and $255,151 for age 65+ by Vanguard Report on Bankrate.com. Annualized Return is 6.57% on the S&P 500 in my excel spreadsheet. This is all covered in detail in my YouTube video on VLBusa.

To the right, you see a “typical” projection or $1,483,667 and an “annualized spread” of ($492,044 to $1,257,685) a S&P 500 results of ($161,000 to $2,737,010) and a 7% “fixed rate” of $873,817.

What would you advise your client?

Now when you look at the 5 percentages that made $1 million+ on the Balance Table and add them up the ODD’s = 23.94% of hitting a $1,000,000+ goal. Four of them with 7% or less ODD’s, one is at 11.27%!

In my YouTube video you will learn how I increase those odds and at what point do you quit, when is adding money just not worth the risk! And when do you start up a Plan B to minimize some of the risk?

I also touch on “Sand-pile Theory” and “Black Swan” events and how they fit into this situation. Because no matter how much time you and your client spend on the planning, Sand-pile Theory proves you can’t predict Blank Swans, and they will POPUP whenever they want, no warnings or Red Flags!

Note: We want the “good” Black Swans, it’s the “evil” one’s that Blow-Up the best planned 401k’s!

The Primary Cause of Failure…

Expectations are being set “Unrealistically High” giving a false sense of security, therefore; there is no sense of urgency to make any necessary corrections or alternative plans.

Necessity of a PLAN B…

Because of the low odd’s of meeting a goal and the unpredictability of Black Swans, there needs to be a Plan B. Not in the Market or exposed to Market Risk.

YouTube\VLBusa, https://www.youtube.com/channel/UCyyWVSPOtVUaZ1xoQeZAZMQ

?EXPOSED - REAL Odds of the S&P 500 - PART 1 https://youtu.be/5JiQ67DdpXs