Monday, September 27, 2021

Local Experts: Importance of sequence of returns during retirement

Ken Kendall, CFP, CLU, Kendall Financial LLC. Member, Wealth and Wisdom Institute
Ken Kendall, CFP, CLU, Kendall Financial LLC. Member, Wealth and Wisdom Institute

Planning for retirement is a challenge that causes sleepless nights for many Americans. Saving diligently, choosing investments wisely and taking advantage of qualified savings opportunities are certainly great strategies to use during the accumulation phase of retirement planning. Unfortunately, many people overlook another phase that may be even more important.

It’s the distribution phase-because it’s not just about how you save. It’s also about how you spend. Managing your retirement income is crucial to your retirement success. Overlooking this important factor could put your retirement comfort in jeopardy.

Let me give you an example: During the 30 year period of 1970-1999, the stock market, as measured by the S&P 500®, had an average return of 14.84 percent. If you took each year’s return, and mixed them up in any order you want, the average would be 14.84 percent.

So if you had $1M in your account, and you withdrew $100,000 per year, your account balance should still increase over the 30 year period, right? You only withdrew 1 percent annually, but the returns averaged 14.84 percent, so the account should increase by 4.84 percent annually, correct?

Unfortunately in the real world , and especially the real stock market, you don’t receive the same rate of return every year. So in this example, even though the average return was 14.84 percent annually, if you started withdrawing $100,000 annually in 1970, the account balance would be ZERO after 14 years. How could that be?

Because the sequence of returns is critical during the withdrawal phase. The bottom line is that managing your portfolio during the withdrawal phase may be even more important than during the accumulation phase.

Morningstar Associates, one of the leading investment research firms in the investment world, conducted an analysis to determine the “safe” rate of withdrawal from a retirement portfolio. They determined that due to the volatility of the investment market returns, the “safe” rate of withdrawal is approximately 2.8 percent.

In other words, if you withdraw more than 2.8 percent annually from your retirement portfolio, you stand a very good chance of running out of money.

Our firm specializes in helping retirees, and those planning for retirement, to make smart decisions regarding their investment portfolio. We have a number of ideas to help you navigate the tricky world of retirement planning. We would be delighted to provide you a free analysis of your retirement plan and portfolio.

Please consider allowing us to give you a 2nd opinion on your retirement plan and investment portfolio.

I’ll be glad to discuss tax strategies if you’d like, feel free to send me an email [email protected], or call my office 972-874-8757.


By Ken Kendall, CFP, CLU, Kendall Financial LLC. Member, Wealth and Wisdom Institute

CTG Staff
The Cross Timbers Gazette News Department

Related Articles

Popular This Week