What impact will market volatility have on my chances of success?
Five key risks can have a significant impact on whether your savings last the full length of your retirement: withdrawal rate, market performance, inflation, health care costs and your longevity. Let’s look at how market performance – especially the order in which you experience different returns – can affect how long your savings will last.
Impact During Savings
When you’re still working and not withdrawing from your portfolio, your average annual return is a good indicator of your investment success. That’s because, with no additions to or withdrawals from your portfolio, the sequence of returns — in what order your best and worst years come — has no impact on your portfolio’s final value.
The chart below shows how three different returns paths got three different investors to the same outcome.
Front of Chart
As the chart shows:
|All three investors ended up with the same amount of money over the illustrated period. Even though the sequence of returns for each of these investors was very different, all three achieved the same 7% average annual return.|
Impact During Withdrawal
While you may not have to worry about sequence of returns when you’re saving, it can be critical when you start spending down your assets during retirement.
The chart below shows how different return paths can dramatically change the portfolio outcome.
Back of Chart
As the chart shows:
|All three of these retired investors achieved the same 7% average rate of return over a 25-year period and all made identical withdrawals with very different outcomes.|
|Two of the investors — Mr. White and Mrs. Doe — actually had identical returns, just in reverse order.|
|Since Mr. White’s negative returns came early in his retirement, his withdrawals were devastating to his bottom line. He ran out of money at age 88. Mrs. Doe not only had sufficient money throughout her retirement, she was able to leave a legacy to her heirs.|