Sequence Risk Initial Assumptions

Discuss the potential challenges in following the broadly discussed "4%" rule when planning retirement income.

Note: You must be registered with a broker/dealer to discuss investment concepts with a consumer.

The purpose of this presentation is to share the potential challenges in following the broadly discussed “4%” rule when planning retirement income. In the 1990’s, William Bengen researched historical market returns and presented his findings stating that based on prior market history no case existed in which a 4% annual withdrawal exhausted a retirement portfolio in less than 33 years.

As a result of this study, many believe that withdrawing 4% per year from an equity portfolio, with an increase for inflation each year, will preserve their account through their entire retirement.  

Let’s take a look at how this rule might work by entering a few numbers and then looking at some results.

First, we will start with a balance of $1,000,000 so we have a nice round number.

Next let’s enter a retirement age and a life expectancy that will span 30 years from retirement.

For a withdrawal rate let’s select 4% with an annual increase of 3% to account for inflation.

As you can see, if the balance lasts, this would generate a total cumulative retirement income of over $1,900,000. This is almost double our starting balance. So we can see how important growth is during the 30 years.

Last, let’s select a popular equity index, the S&P Total Price with a starting year of 1960 so we can see how one set of historical returns impacts a retirement income planning analysis.

[Transition:] With these assumptions, we will look at two screens of results. First, what would happen with a balance over 30 years if these index returns were applied to grow the balance each year, but with no annual withdrawals. Second, we will look at a balance over 30 years with the same index applied but with annual withdrawals. On each screen we will shuffle the index returns to understand the potential impact of different sequence of returns.

No math presented on this screen.