How you set up your assets after you retire and how you take income from those assets is more complex. Here’s why:

In the Accumulation Stage the order of your rates of return doesn’t matter.

Scenario 1

Let’s say you invest $100,000 ten years before retirement. If you get a consistent 7% return each year for ten years you will end up with $196,715.

Years	1	2	3	4	5	6	7	8	9	10
Capital	$107,000	$114,490	$122,504	$131,080	$140,255	$150,073	$160,578	$171,819	$183,846	$196,715
Return	7%	7%	7%	7%	7%	7%	7%	7%	7%	7%

Scenario 2

The ten-year average is 7% — you still end up with $196,715. The order of returns while accumulating wealth — and not taking an income — does not matter.

But markets fluctuate. So, let’s say during that decade you get a variable rate of return as shown in this table (the ten-year average is 7% — you still end up with $196,715):

Years	1	2	3	4	5	6	7	8	9	10
Capital	$109,400	$124,716	$140,292	$173,625	$166,680	$183,664	$181,828	$220,575	$211,752	$196,715
Return	9.4%	14%	13%	23.2%	-4%	10.19%	-1%	21.31%	-4.00%	-7.1%

Scenario 3

Even if we reverse the order of returns shown in Scenario 2 you will still end up with $196,715 after ten years.

Years	1	2	3	4	5	6	7	8	9	10
Capital	$92,898	$89,187	$108,020	$107,105	$118,020	$113,299	$139,584	$157,730	$179,812	$196,715
Return	-7.1%	-4%	-21.31%	-1%	-10.19%	-4%	23.2%	13%	14%	9.4%

Graph 1: Wealth Accumulation

Before retirement we develop a disciplined plan to grow your portfolio. Meet with us to learn more.

After retirement you still want your assets to grow but you also want income. You are both growing and depleting your nest egg. During the depletion stage market fluctuations will have an impact on your portfolio. The order of returns will make a difference on the quality of your retirement.

Scenario 1

Let’s look at $100,000 in retirement savings. If the markets return 7% each year while you withdraw an income of 7% your funds are in balance. At the end of ten years with a consistent 7% rate of return – and a depletion rate of 7% – you’ll still have $100,000.

Years	1	2	3	4	5	6	7	8	9	10
Capital	$100,000	$100,000	$100,000	$100,000	$100,000	$100,000	$100,000	$100,000	$100,000	$100,000
Return	7%	7%	7%	7%	7%	7%	7%	7%	7%	7%
Withdrawal	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000

Scenario 2

But markets aren’t consistent. Let’s say you receive better than average rates of return. In the following table the average return is 7% per year but you will end up with more than the $100,000 you had at the start.:

Years	1	2	3	4	5	6	7	8	9	10
Capital	$102,400	$109,736	$117,001	$137,146	$124,660	$130,363	$122,059	$141,070	$128,427	$112,307
Return	9.4%	14%	13%	23.2%	-4%	10.19%	-1%	21.31%	-4.00%	-7.1%
Withdrawal	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000

Scenario 3

In the Scenario 2 example you get better than 7% rates of return in the first four years. Those initial years of positive growth work to your advantage even as you deplete — or take income from — your portfolio.

As you can see you will end up with less than the $100,000 you had at the beginning. Why? Because you cannot recover from those first few years of negative returns while taking an income. You can easily run out of money:

Years	1	2	3	4	5	6	7	8	9	10
Capital	$85,898	$75,462	$84,544	$76,698	$77,514	$67,413	$76,053	$78,940	$82,992	$83,793
Return	-7.1%	-4%	-21.31%	-1%	-10.19%	-4%	23.2%	13%	14%	9.4%
Withdrawal	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000	$7,000

As you can see you will end up with only $83,150. Why? Because you cannot recover from those first few years of negative returns. You could easily run out of money.

After retirement we develop a rigorous plan to maintain and grow your assets while you take an income. Meet with us to learn more.

After retirement we develop a rigorous plan to maintain and grow your assets while you take an income. Meet with us to learn more.