Sequence of Returns – It Matters

Relying on averages can be dangerous. Brian’s dad had a saying, “You can drown in a river that averages 3 feet deep.” Using averages can be risky, and applies to retirement planning too.

Accumulation Phase

During the accumulation phase of retirement planning, the impact of sequence of returns can be minimal (See Charts Below).
Three investors made the same initial hypothetical investment of $1,000,000 at age 40 with no additions or withdrawals.
All had an average annual return of 7% over 25 years. However, each experienced a different sequence of returns.
At age 65, all had the same portfolio value, although they had experienced different valuations along the way.

Money Matters - FInacial Planning 1

Money Matters - FInacial Planning 1

Withdrawal Phase

During the withdrawal phase, it’s a different story. The sequence of returns can have a critical impact on portfolio value due to the compounding effect on the annual account balances and annual withdrawals (See Charts Below).

  • Three investors made the same initial hypothetical investment of $1,000,000 upon retirement at age 65.
  • All had an average annual return of 7% over 25 years, which followed the same sequences as during the savings phase.
  • All made withdrawals of $60,000, adjusted annually for inflation.
  • At age 90, all had different portfolio values due to annual withdrawal.

Financial Planning Money Matters Scenario 2

Financial Planning Money Matters Scenario 2

Withdrawing assets in down markets early in retirement can ravage a portfolio. How do you counter your Sequence of Return risk? Here at Virtus Wealth Management we use several techniques including considering a dynamic approach to spending and strategies that incorporate downside risk management. There is one thing for certain … the market does not work in averages (see final chart below); we help our clients proactively prepare accordingly.

Wealth Management Financial Planning Scenario 3

 

Karen Spence, CRPC®
Wealth Manager

2535 East Southlake Blvd., Suite 100
Southlake, TX 76092
Phone Numbers:
817-717-3812
817-735-1095

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Level Four Advisory Services, a registered investment advisor. Level Four Advisory Services and Virtus Wealth Management are separate entities from LPL Financial.

No strategy assures success or protects against loss. Investing involves risk including loss of principal.

Some of this material was prepared by Blackrock.

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