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February 22, 2012
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Financial Planning Article
THE SEQUENCE OF RETURNS
In Financial Planning, baby boomers find investment advice on how to meet today's needs while planning for retirement. Michael Allison Investment Advisor |
(50PlusPrime) BLOOMFIELD HILLS, MICHIGAN --
When you are funding your own retirement don’t overlook the sequence of returns.You‘ve been investing for years, built a sizeable investment portfolio; you’ve even hedged your bets by purchasing insurance. So now you are finally going through the transition from working to retirement.
To anyone liquidating assets periodically in their retirement, what's important isn't just the rate of return it's also your sequence of returns. When taking withdrawals from your IRA or 401(k), the sequence of returns will have a significant impact on whether you leave behind a legacy or run out of money.
Here is an example: both column one and column two start out with the same $500,000 hypothetical investment, they are taking the same withdrawal, they even get the same return, 11.3% but column one’s sequence of hypothetical returns are the exact opposite of those found in column two.
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Column One | Column Two |
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| YEAR | INVESTMENT | WITHDRAWAL | ACCOUNT | INVESTMENT | WITHDRAWAL | ACCOUNT | ||
| RETURN | BALANCE | RETURN | BALANCE | |||||
| 1 | -8.40% |
$30,000.00 |
1.30% | 30,000 | $476,600 | |||
| $427,900 | ||||||||
| 2 | 4.00% | $30,900.00 | $414,030 | 10.10% | 30,900 | $493,646 | ||
| 3 | 14.30% | $31,827.00 | $441,410 | 7.60% | 31,827 | $499,385 | ||
| 4 | 19.00% | $32,782.00 | $492,275 | 30.40% | 32,782 | $618,417 | ||
| 5 | -14.80% | $33,765.00 | $385,752 | -3.10% | 33,765 | $565,419 | ||
| 6 | -26.50% | $34,778.00 | $248,942 | 31.50% | 34,778 | $708,917 | ||
| 7 | 37.30% | $35,822.00 | $305,976 | 16.80% | 35,822 | $792,335 | ||
| 8 | 23.70% | $36,896.00 | $341,596 | 5.20% | 36,896 | $796,799 | ||
| 9 | -7.30% | $38,003.00 | $278,793 | 18.60% | 38,003 | $906,602 | ||
| 10 | 6.60% | $39,143.00 | $257,966 | 32.00% | 39,143 | $1,157,844 | ||
| 11 | 18.60% | $40,317.00 | $265,631 | 6.10% | 40,317 | $1,188,270 | ||
| 12 | 32.10% | $41,527.00 | $309,451 | 22.40% | 41,527 | $1,412,559 | ||
| 13 | -4.90% | $42,773.00 | $251,484 | 21.10% | 42,773 | $1,667,978 | ||
| 14 | 21.10% | $44,056.00 | $260,516 | -4.90% | 44,056 | $1,542,024 | ||
| 15 | 22.40% | $45,378.00 | $273,416 | 32.10% | 45,378 | $1,992,099 | ||
| 16 | 6.10% | $46,739.00 | $243,383 | 18.60% | 46,739 | $2,315,890 | ||
| 17 | 32.00% | $48,141.00 | $273,197 | 6.60% | 48,141 | $2,419,903 | ||
| 18 | 18.60% | $49,585.00 | $274,290 | -7.30% | 49,585 | $2,194,633 | ||
| 19 | 5.20% | $51,073.00 | $237,535 | 23.70% | 51,073 | $2,663,688 | ||
| 20 | 16.80% | $52,605.00 | $224,883 | 37.30% | 52,605 | $3,604,638 | ||
| 21 | 31.50% | $54,183.00 | $241,605 | -26.50% | 54,183 | $2,597,028 | ||
| 22 | -3.10% | $55,809.00 | $178,282 | -14.80% | 55,809 | $2,157,378 | ||
| 23 | 30.40% | $57,483.00 | $174,997 | 19.00% | 57,483 | $2,508,718 | ||
| 24 | 7.60% | $59,208.00 | $129,107 | 14.30% | 59,208 | $2,808,257 | ||
| 25 | 10.10% | $60,984.00 | $81,111 | 4.00% | 60,984 | $2,859,042 | ||
| 26 | 1.30% | $62,813.00 | $19,369 | -8.40% | 62,813 | $2,555,498 | ||
| Average Return | 11.30% | |||||||
“Well, do you feel lucky?”
How lucky you were, in the first 26 years of your retirement your investments grew annually an average of 11.3%. So how unlucky would you feel if after achieving 11.3% annually and all you took out of your account was a distribution of 6% a year, adjusted for 3% inflation and you ran out of money in the 27th year? It’s very important to remember when taking periodic distributions from your retirement accounts; it’s not investment returns that are important it’s the sequence of those returns.
Since no one can predict with any certainty what their own sequence of returns will be every retiree relying on their investments for income, needs to take steps to offset the randomness of these returns. If you are nearing retirement and would like to discuss strategies that will address your sequence of returns contact my office for an appointment.
You can reach me by Phone at 248-334-9600 or Email me at michael.allison@lpl.com and be sure to visit my website at www.retiringwithmike.com
Securities offered through LPL Financial. Member FINRA/SIPC.
