Discuss the same type of analysis but add an annual retirement withdrawal and see what impact a change to the sequence of returns might have. |
So, here are two sets of values starting out equal. We start with the $1,000,000 balance, and apply the index returns each year in historical order, and we have added an annual withdrawal representing a retirement income. We can see right away that for this S&P Index starting in 1960, our balance runs out before the end of the 30 years. This might call into question the 4% rule as a general safe guideline in managing a retirement account. Now there are other indexes and other starting years that might generate enough growth to make this balance lasts, but of course there are no guarantees which results one can expect to get in the future. Now, like on the previous screen, let’s shuffle the returns forward one year and see what happens to the results on the right side of the table. The balance remains high enough to provide the full 30 years of withdrawals, and the EOY balance is over $780,000. What a difference a one year forward shuffle makes! Now, let’s shuffle back three years. We see that in this sequence of returns, the balance runs out 4 years earlier and the retirement income is cut short. Again, isn’t it surprising how just a few changes to the sequence of returns can have such a major impact on a retirement income? If we look to the bottom of the table, we can see that with this set of assumptions, the most favorable sequence would provide for the full $1,903,017 retirement withdrawals, with over $2,700,000 remaining in the EOY Balance. And the least favorable sequence would only provide $1,230,803 in retirement income with the balance running out in year 25. So, as you think about your strategy in creating a retirement income from your equities, how do you feel about the impact sequence of returns may have on your situation? If in working together we could find ways to reduce the negative impacts of unfavorable sequence of returns, would that be something you would be interested in discussing? |
Withdrawal = Initial Total Assets Assumption * Withdrawal % * (1 + Inflation Rate) ^ n where n=year number Rate of Return = Market return for selected year, ascending. EOY Balance = ([previous year] EOY Balance - Withdrawal) * (1 + Rate of Return) |