Have you ever wondered how long your retirement nest egg will last?
It’s not just about how much you have, but it’s also about your sequence of returns.
Your sequence of returns is the year by year returns that your retirement assets continue to experience while you are drawing on them for retirement income.
And they have a HUGE IMPACT on how long your assets will last!
Here are a couple of examples….
Suppose you retire with $500,000.
And you withdraw a modest $25,000 per year with a slight increase for inflation each year
Let’s take a hypothetical sequence of returns during your first five years of retirement.
Year 1: 16%
Year 2: 7%
Year 3: 10%
Year 4: 5%
Year 5 is finally a loss: -12%
With compounding, you’ll average a good positive return over these 5 years.
Now let’s keep repeating that sequence of returns in the exact same order until your annual withdrawals have completely used up the assets.
That’s 34 years of income.
But, what would have happened if you had started withdrawing money in a down market?
To find out, let’s take those same 5 numbers, and this time we’ll reverse the order…
You still get the same compounded average, but this time you’re starting out with a significant loss instead of a gain.
And as before, we’ll keep repeating that sequence until your annual withdrawals have completely used up the assets.
But in this example, it happened about 11 years sooner!
You’d have lost 11 years of income, and only because you got the same returns in a different order.
While you can’t predict if you will retire into an up or down market, there are potential retirement income solutions to reduce or eliminate sequence of returns risk.
Jimmy Miller, the founder of Baobab Wealth Management, takes the time to identify risks in your life and portfolio that many other advisors don’t take into account, or even identify.
Mitigating the potential danger of the sequence of returns is not a one-size-fit’s all approach
Get a retirement income plan that takes all risks into account to make sure that you don’t run out of money in retirement.