This tool demonstrates that the sequence (or order) of returns (on a portfolio) is important. If one should experience a few low return years at the start of distribution, it can greatly reduce your portfolio;s life or future (safe) withdrawals. In contrast, if one should experience some high return years at the start of the distribution period, it can greatly extend the portfolio's life. During the accumulation years, it makes no difference what order the returns occur in. As long as the returns are the same values (even in a different order), the final balance will be the same. The reason is that you are not withdrawing funds during the accumulation period. |
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This calculator assumes all withdrawals are made at the beginning of the year. The math for this calculator is computed in four detail spreadsheets of eight columns each. Since the spreadsheets are basically identical, only one spreadsheet is described below: Column one is the age. Column two is the annual assumed rate of return. Column three is the balance at the beginning of the year before withdrawal. Column four is the withdrawal at the beginning of the year. For accumulation years, the withdrawal is always zero. During the Distribution Years, the withdrawal in the first year is the initial withdrawal in % times the balance at begin of year. For latter years (rows), it is the withdrawal from the previous year times the inflation rate. Column five is the balance at the beginning of the year after withdrawal. It is simply column three minus column four. Column six is the interest or loss for each year. It is simply column two times column five. Column seven is the balance at the end of the year. It is simply column five plus column six. Column eight is the year. The two important pieces of information, which are the annual return and the balance at end or each year, are pulled from the detail spreadsheet and displayed in a summary sheet on the main screen. This is done for both Scenario A and Scenario B, thus there are two sets of information plus the age on the summary sheet. Scenario A is the positive one with the higher returns occurring early in distribution. Scenario B is the gloomy one with the lower returns occurring early in the distribution phase. In addition to the spreadsheet calculations, the calculator tests for a zero balance each year. When it finds a zero balance, it stores the age (for that year or row) and presents it in the results. |