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Sequence of Returns

Retirement Funding Insights Investing

We all know markets go up and markets go down, but do we truly understand the impact it has on our retirement?

While working (our accumulation years) we often evaluate an investment based on the historical ‘average’ rate of return; not bad for one of the criteria.  But what many are not fully aware of is the impact of the ‘sequence of returns’, the order of the ups and downs that make that ‘average’ return, during retirement.

To help you understand how this could apply to you, let’s look at a hypothetical situation.

Working (Accumulation) Years:

Joe is 35, he inherited just under $170,000 from his grandmother and decided to put this aside for retirement.  He places the funds into an account that emulates the S&P 500 Total Price Index from 1960 for the next 30 years.

During Joe’s working years, he does not touch the funds. The ending value is roughly a $1M portfolio.  He is grateful to his grandmother.

What’s interesting is had Joe received the market returns from 1960-1989, or the returns were ‘scrambled up’, or run even backwards, the ending value of his account at age 65 is the same.  In other words, regardless of whether the first year was a 17.27% gain (1983) or a -2.97% loss (1960), as long as Joe did not withdraw funds, he accumulated a nice $1M portfolio for his retirement ($1,000,161 to be exact).

The ‘average’ rate of return for this index-like portfolio, about 6.1% regardless of ‘sequence’ of the market ups and downs.

During Joe’s working years, he does not touch the funds. The ending value is roughly a $1M portfolio.  He is grateful to his grandmother.

What’s interesting is had Joe received the market returns from 1960-1989, or the returns were ‘scrambled up’, or run even backwards, the ending value of his account at age 65 is the same.  In other words, regardless of whether the first year was a 17.27% gain (1983) or a -2.97% loss (1960), as long as Joe did not withdraw funds, he accumulated a nice $1M portfolio for his retirement ($1,000,161 to be exact).

The ‘average’ rate of return for this index-like portfolio, about 6.1% regardless of ‘sequence’ of the market ups and downs.(MoneyTrax, Circle of Wealth calculator using S&P 500 Index Price, no taxation reflected)

Retirement (Distribution) Years:

At age 65. Joe begins withdrawing funds from his portfolio for retirement. The fund did so well during his ‘working years’ Joe decided to keep it invested in the same S&P 500 Index based portfolio.

Joe heard that he should be able to take a 4% withdrawal from his portfolio and never run out of money.  So, he starts taking his money out, each year, like clockwork.

His best possible outcome: he retired in the right year, pulled out $4.637M and the funds lasted until age 94.

His worst possible outcome: he retired in the wrong year, pulled out only $1.23M and ran out of money by age 86.

What is the difference? 

The Impact of ‘Sequence of Returns’, the timing of the market ups and downs on Retirement Income during the Distribution Years.(MoneyTrax Circle of Wealth calculator using S&P 500 Index Price, no taxation reflected)

We are told to focus on the ‘average’ rate of return of our portfolio during our working years, and that may work.  However, average and actual can become dramatically different story during retirement, your distribution years.

What many fail to understand is a withdrawal from your portfolio during a market downturn has an exponentially negative affect.  Essentially, financial peace of mind can be lost.

How do you keep this from happening to you?

We recommend having a diverse strategy that contains a portion of non-market correlated assets with guaranteed returns to fuel your desired income during market downturns.  This may enable you to maintain your income and financial peace of mind during down years by not having to withdrawal from your market investments.

Contact us to assess your scenarios, so you too can have
Financial Peace of Mind.

Simplicit Financial | Kate@SimplicitFinancial.com | 602.717.2011


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